LONDON — The pound sterling was lower against the US dollar on Thursday after Britain’s central bank said it expected a recession for all of 2023 and the first half of 2024.
Sterling was trading at $1.1162 at 1:20pm London time, its lowest since October 21, after starting the session at $1.1418 and falling throughout the morning.
This came as the Bank of England hiked interest rates by 75 basis points to 3% in its largest single hike in 33 years.
However, interest rates were also expected to peak at lower levels than what is currently priced into financial markets, which is around 4.6%.
“The majority of the committee believes that should the economy develop broadly in line with the latest projections in the monetary policy report, further hikes in the policy rate may be needed to bring inflation back on target on a sustainable basis, albeit to a peak lower than what the financial markets have priced in,” the statement said.
BOE Gov. Andrew Bailey said in a news conference after the announcement it was “important because it means, for example, that rates on new fixed-term mortgages don’t have to go up the way they have.”
The pound has been rocked by instability in UK financial markets and political unrest over the past month.
It hit a record low of under $1.10 against the dollar in September and analysts have warned it remains vulnerable.
“This isn’t the first time GBP has fallen in response to a BoE rate hike this year,” said Jane Foley, head of FX strategy at Dutch bank Rabobank, in emailed comments.
“In May the pound fell by 25 basis points after a rate hike as expected and in August the pound fell after the bank hiked rates but warned of a 5-quarter recession from Q4 2022.”
“Regarding the UK economy, bank officials now expect GDP to have contracted by 0.5% in the third quarter of 2022, 0.9 percentage points weaker than expected in the August policy report.”
“Keyly, the bank also warned that the move higher in interest rates ‘to a peak will be lower than what the financial markets have priced in’. So there was very little from the bank to stop GBP moving lower.”