The Bank of England raised its key interest rate to a 13-year high on Thursday, but it did not help the pound, which hit a two-year low.
With 6 to 3 votes, the Bank of England decided to raise the rate to 1% by a quarter of a point, the fourth increase in the current cycle, as it seeks to control inflation. Minorities voted in favor of a half-point increase.
On Wednesday it slipped 1.7% from $ 1.2636 to $ 1.2400, hovering at an unprecedented level since July 2020 and hit a session low of $ 1.2362. This is because traders have focused on a weak economic outlook, as well as a divided monetary policy committee. The Bank of England has forecast that the UK economy will shrink next year.
“Okay, when you consider that three MPC members wanted to raise rates by 50 basis points over 25, you would think that the pound would rally rather than stop selling. However, it is noteworthy that these three hawks (Haskell, Mann and Saunders) are either external members or are leaving, so their vote carries less weight, “said Fawad Razakzada, market analyst at FOREX.com in a note addressed to clients.
The UK has seen a drop in the price of natural gas – the major UK natural-gas contracts have increased by 168% over the past year – as well as rising wages. The UK economy, however, has suffered a greater blow from the coronavirus epidemic than the United States or the eurozone.
The Bank of England has said it expects inflation to reach 10% this year. That background makes it difficult for Sterling to be praised against his international rivals.
“As fears grow that the UK is heading for a contraction in production, amid rising prices at home and abroad, weak growth in the eurozone due to the Russia-Ukraine conflict and China's lockdown, it should limit the pound's appreciation.”
The pound is at risk of hitting $ 1.20, which has proved to be “the last line of defense more than once in previous years,” said Alex Kuptsekevich, senior market analyst at FxPro in a note addressed to clients.
The Bank of England has worsened its economic outlook for 2023, expecting the economy to shrink in response to tight financial conditions and the impact of high energy prices. Creates, ”he said.
The Federal Reserve decided on Wednesday to raise rates by half a point, and the central banks of Australia and Brazil also raised rates this week. Norway's central bank has suspended but said it could raise rates again in June.
Yield of 2 year gilt TMBMKGB-02Y,
12 basis points decreased 1.504%.
– Barbara Colmeyer contributed to this report