The pound trimmed an earlier drop after the Bank of England raised interest rates and signaled the possibility of further tightening given sticky inflation and the economy’s resilience.
(Bloomberg) — The pound trimmed an earlier drop after the Bank of England raised interest rates and signaled the possibility of further tightening given sticky inflation and the economy’s resilience.
The currency almost erased an earlier drop of 0.5% versus the dollar and two-year UK bonds briefly reversed gains before paring the move. Money-market traders added to bets on the terminal rate, pricing it at 4.95% by September, compared to 4.90% before the decision.
The BOE lifted its key rate a quarter point to 4.5%, the highest level since 2008 and in line with traders’ expectations. It also delivered the biggest upgrade to growth projections since it gained independence in 1997, erasing a recession previously forecast and anticipating the real economy will be 2.25% bigger by mid-2026 than it thought in February.
Seven members of the Monetary Policy Committee voted to lift the rate, with Silvana Tenreyro and Swati Dhingra pushing for a pause for a third meeting.
“Even taking into account the fact that we had two dissenting votes at the MCP to keep rates unchanged, this was a more hawkish outcome of the meeting than we were expecting,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole CIB.
The pound traded at $1.2592 as of 1 p.m. in London. It has outperformed all other Group-of-10 currencies against the dollar this year, posting a 4.5% return as of Wednesday’s close. Inflation remains in double digits and predictions that the UK economy would buckle after a run of aggressive hikes have proved premature.
In the longer term, however, the pound may prove vulnerable given the economic damage inflicted by further tightening, according to Ed Hutchings, head of rates at Aviva Investors.
“The more the BoE hikes, the larger and quicker cuts may be when they come,” he said. “This should see sterling weakness and gilt yields supported over the medium term.”
–With assistance from Naomi Tajitsu.
(Updates with comments, context and prices throughout.)
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