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The pound has weakened after the Bank of England’s aggressive rate hike of 0.75 percentage points and warnings of a recession that could last two years. Sterling fell 1.4% to 1.123 against the US dollar and was 0.8% lower against the euro at 1.15. The Bank raised the key rate to 3 percent – its highest level since 2008 – in the biggest increase in 33 years. The Monetary Policy Committee warned last month that rising inflationary pressures would require a stronger response than previously thought. As members voted to raise the key rate, they warned that the UK could be on course for the biggest recession since reliable records began in the 1920s. Gross domestic product (GDP) could contract every quarter for two years, with growth only returning in mid-2024, they said. However, the Bank cautioned that this forecast was based on interest rates reaching 5.2%, which the Bank said it did not necessarily expect to happen. A recession could be prolonged but would be less than half as severe as the 2008 financial crisis, he said. This chart shows the movements in UK interest rates since 2007 (PA) Markets had expected the key rate to peak at 5.25%, but the pound was forced lower after the Bank signaled this may not happen. The UK economy is now forecast to shrink by 1.9 per cent next year – worse than the August forecast of 1.2 per cent. On Wednesday, the pound staged its biggest monthly rally in a year, shaking off the market effects of weeks of political turmoil, but the recovery was only fleeting. It fell to a record low of $1.0327 against the dollar in late September after the government announced plans to cut taxes and increase borrowing. Some analysts expect the pound to fall further during the rest of this year. This week, Nomura forecast a drop to around $1.05 by the end of the year and Goldman Sachs predicted $1.10 in three months.
