The pound and British government bond yields fell sharply on Thursday after the Bank of England raised interest rates to their highest level since 2009 but warned that the economy was at risk of a recession.
At the time of writing, sterling is down almost 2% against the US dollar to a trading level of 1.2395, its lowest level since July 2020. It is expected to record the biggest daily drop since March 2020 when the Covid-19 outbreak hit world markets. Not only that, the pound also sustained 1.3% against the euro to its lowest level since December 2021 at a trading level of 85.04 pence.
The BoE maintained its forecast for economic growth this year at 3.75%, but reduced its forecast for 2023 by a contraction of 0.25 from the previous 1.25% growth estimate. Not only that, the BoE also reduced its growth forecast for 2024 to 0.25% from 1.0% previously.
Chris Scicluna, head of economic research at Daiwa Capital Markets argues that the weakness of the growth outlook means the inflation outlook is also relatively weak.
At the same time, BoE policymakers also disagreed as some were of the view that the guidelines set by the BoE were difficult to achieve with risks to economic growth deteriorating. Two BoE members are of the view that further increases are inappropriate.
In addition to the Central Bank of England, several other central banks such as the United States, Britain and Australia have all decided to raise interest rates this week.
Worrying inflation has also prompted Iceland to raise rates by one percentage point on Wednesday. But there are banks that have the same concern as the BoE that the country's economy will go into recession.
The US dollar index, which measures the US dollar against six major currencies, traded stronger by 0.70% at 103.308.
