The United Kingdom’s pound sterling and currency-related exchange traded fund plunged Thursday after the Bank of England hiked rates to their highest level since 2009 but warned of recession risks.
The currency-focused Invesco Currency Shares British Pound Sterling (NYSEArca: FXB), which tracks the GBP against the U.S. dollar, dropped 2.1% on Thursday.
Meanwhile, the sterling retreated to a low of $1.23615, its lowest level against the greenback since July 2020, and was on its biggest one-day pullback since March 2020, or one of the worst days since the Covid-19 pandemic first settled in, Reuters reports.
The BoE maintained its economic growth projection for the year at 3.75% but cut its estimates for 2023 to reflect a contraction of 0.25% from a previous estimate of 1.25% growth. Additionally, the central bank reduced its growth projection for 2024 to 0.25% from an earlier 1.0%.
While BoE Governor Andrew Bailey said the forecasts did reflect a technical definition of recession, the economy is still in for a very sharp slowdown.
“The weakness of the growth outlook means that the inflation outlook is pretty weak too,” Chris Scicluna, head of economic research at Daiwa Capital Markets, told Reuters. “Markets are right to take a step back, and we had thought that scale of tightening priced in was excessive.”
Furthermore, the BoE hiked its estimates for price growth, which now reveal consumer price inflation jumping above 10% for the last three months of the year, compared to earlier predictions of a peak of 8% in April.
Meanwhile, the Monetary Policy Committee exhibited dividing opinions, with two members arguing that the guidance was too strong, given the risks to growth, and three policymakers wanted a larger 50 basis point interest rate hike.
“Two members’ suggestion that further hikes are not appropriate is resonating,” Neil Jones, head of hedge fund sales at Mizuho, told Reuters.
The BoE’s nine rate-setters voted 6-3 for a hike in Bank Rate from 0.75%, with Catherine Mann, Jonathan Haskel, and Michael Saunders calling for a bigger increase to 1.25%, Reuters reports.
“The new forecasts, taken together with the increasing division among committee members, suggest the Bank is getting closer to a pause in its tightening cycle,” ING economist James Smith told Reuters.
For more news, information, and strategy, visit ETF Trends.