Sterling falls against dollar after surging on BoE interest rates decision

·2-min read
Bank of England governor Andrew Bailey. Sterling slipped ahead of BoE speeches on Friday. Photo: Justin Tallis/POOL/AFP via Getty
Bank of England governor Andrew Bailey. Sterling slipped ahead of BoE speeches on Friday. Photo: Justin Tallis/AFP via Getty

Sterling (GBPUSD=X) slipped against the US dollar on Friday, a day after rallying on the Bank of England's interest rates decision as the prospect of more rate increases loom.

The pound made strong gains following the central bank's move to lift the key rate to a 14-year high of 1.25%, climbing as much as 1.4% against the dollar on Thursday.

However, it declined 0.7% versus the dollar at $1.226 as the mood soured. Against the euro (GBPEUR=X), it fell 0.2% to €1.16, at the time of writing.

It comes as BoE's chief economist Huw Pill warned of more aggressive rate hikes in the coming months if inflation shows signs of becoming a permanent feature of the UK's economy.

Speaking to Bloomberg TV on Friday he said rate-setters stood ready to ramp up the pace of tightening if evidence indicated that wage growth was spiralling and firms were raising their costs to protect margins.

Read more: Interest Rates: Higher UK inflation will trigger multiple hikes, warns BoE economist

"The pound had a strong day yesterday, despite the Bank of England hiking by a meagre 25bps when it was clear that a much bigger hike was needed," said Michael Hewson, chief market analyst at CMC Markets. "Despite some fairly muddled guidance which stated that the bank would act "forcefully" on inflation if necessary."

Threadneedle Street also revised its forecast for the peak of inflation in October to "slightly above" 11%, reflecting the planned increase in the energy price cap in the Autumn.

Read more: Bank of England raises UK interest rates to 13-year high of 1.25%

It signalled that it would "act forcefully" if needed to prevent high inflation becoming more persistent.

"The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit," the Bank said. "The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures."

"The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response."

Britain's inflation rate soared to a 40-year high of 9% in the year to April as food and energy prices spiralled, and the country faces a major cost of living crisis.

Watch: How does inflation affect interest rates?

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