Pound posted its biggest loss since early October and long-dated UK government bonds tumbled after the Bank of England signaled its final interest rate was likely to be lower than investors had expected, raising fears the tightening campaign would not be enough to contain the to tame inflation.
Sterling fell as much as 2.1 percent to a low of $1.1157, while yields on 30-year bonds – which are the most sensitive to the consumer price outlook – rose more than 20 basis points at times.
The Bank of England said that a lower prime interest rate than what markets were pricing in would be enough to push inflation back above 10 percent. As widely expected, it raised its key interest rate by 75 basis points to 3 percent yesterday.
Money market bets on where rates will rise this cycle were broadly unchanged at 4.75 percent, a sign traders were rebuffing the BOE’s more dovish stance.
For investors, the message underscored the predicament policymakers find themselves in as they weigh the need for monetary tightening against the prospect of an economic slowdown. The decision also clashes with the US Federal Reserve’s pledge to raise the rate as needed to ease US price pressures, a key drag on sterling this year.
“The BOE rose by 75 basis points but revised down its growth and inflation forecasts, sending a clear signal that the policy rate path expected by markets ahead of the policy meeting is too high,” said Valentin Marinov, head of the G-10 currency Strategy at Credit Agricole SA.
“The result stands in sharp contrast to Fed Chair Powell’s hawkish message yesterday and could trigger a further decline in sterling-dollar interest rate spreads.”
The Federal Reserve announced its fourth straight hike of 75 basis points and said more would follow.
UK markets are looking more stable than in recent weeks as the government scrapped plans for huge unfunded tax cuts that have led to historic moves in both bonds and the currency.
While this could take the pressure off the need for more aggressive BOE increases in the coming months, traders will await an economic statement from the new government, due later this month, for more details.
“The Bank of England had no choice but to meet market expectations of a 75 basis point hike at today’s meeting,” said Hugh Gimber, global market strategist at JP Morgan Asset Management.
“Such a large hike may seem unwarranted given signs UK activity is already contracting, but there is little evidence so far that the slowdown is enough to tame inflation.”
https://www.independent.ie/business/world/pound-slides-again-even-as-bank-of-england-hikes-key-interest-rate-to-3pc-42117742.html The pound slips again despite the Bank of England raising interest rates to 3 percent