Sterling was trading at $1.1162 at 1:20 p.m. London time, its lowest level since Oct. 21, after opening the session at $1.1418 and falling into the morning. It came as the Bank of England raised interest rates by 75 basis points to 3% in its biggest single rise in 33 years. However, he also said he expects interest rates to peak at a lower level than what is currently priced in financial markets, which is around 4.6%. “The majority of the committee believes that, if the economy develops broadly in line with the latest Monetary Policy Report forecasts, further increases in the Bank Rate may be required for a sustainable return of inflation to target, albeit at a peak below price in financial markets,” it says in its announcement. BOE governor Andrew Bailey said at a press conference after the announcement that it was “important because, for example, it means that interest rates on new fixed-term mortgages should not rise as they have.” The pound has been rocked over the past month by volatility in UK financial markets and political unrest. It hit a record low against the dollar below $1.10 in September and analysts have warned it remains vulnerable. “This is not the first time GBP has fallen in reaction to a BoE rate hike this year,” Jane Foley, head of FX strategy at Dutch bank Rabobank, said in emailed comments. “In May the pound moved lower after an expected 25bps rate hike and in August the pound fell after the Bank raised interest rates, but at the same time warned of a 5 quarter recession starting in Q4 2022.” “For the UK economy, Bank staff now expect GDP to have contracted by 0.5% in the third quarter of 2022, 0.9 percentage points lower than expected in the August Monetary Policy Report ». “Crucially, the Bank also warned that the move higher in interest rates would be ‘at a peak lower than priced into the financial markets’. So the Bank had very little to do to prevent the GBP from falling.”
