Hike rates

Pound crashes as Bank of England warns UK of falling into recession this year

The pound fell after the Bank of England’s announcement on Thursday. Photo: PA Media

The pound tumbled against the dollar (GBPUSD=X) on Thursday, wiping out gains made earlier in the day as traders digested the Bank of England’s decision on UK interest rates.

Threadneedle Street raised rates by 50 basis points (bps) in a bid to fight inflation, its sixth consecutive increase and the biggest rise since 1995.

Eight of nine MPC members voted in favor of an immediate 50 basis point rate hike, with Silvana Tenreyro acting as the lone dissenter in favor of a standard 25 basis point hike.

However, the Bank warned of the outlook ahead, with inflation expected to hit 13% by the end of the year and the UK set to slide into recession in the final quarter of the year.

The British pound fell slightly against the US greenback at $1.2116, down 0.2%, while it was also down 0.4% against the euro (GBPEUR=X) on the day. -the.

“The pound has fallen quite sharply against its major peers so far this afternoon following a very gloomy assessment of the UK economy by the Bank of England,” said Matthew Ryan, chief executive. of the market strategy of global financial services company Ebury.

“We’ve run out of fingers and toes to track the number of times the MPC has revised its inflation forecast upwards over the past year. UK headline inflation is now set to peak to 13.3% in October and remain just below double digits in twelve months.

“The bank’s assessment of the impact of the cost of living crisis on economic activity is particularly concerning. Policymakers now expect the UK economy to contract throughout 2023, with a peak-to-trough drop of more than 2%. This is a much steeper slowdown than market participants had expected, hence the first impulse sell-off in the pound.”

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It comes as inflation hit 9.4% in the year to June, partly due to a 42% year-on-year rise in gasoline prices and an increase of almost 10% of food prices.

Meanwhile, Michael Hewson of CMC Markets said: “With the pound already down 10% year-to-date against the US dollar, the bank needs to act much more aggressively to control imported inflation. , especially with the potential for another 50% or 75 basis points from the Federal Reserve next month.

Watch: How does inflation affect interest rates?