© Reuters. FILE PHOTO: UK pound coin plunges into water in this illustration picture, October 26, 2017. Picture taken October 26, 2017. REUTERS/Dado Ruvic
By Samuel Indyk
LONDON (Reuters) -The British pound extended its losses against the euro and dollar on Thursday after the Bank of England raised its main interest rate to the highest level since 2008, while hinting that rates were near their peak.
The BoE voted 7-2 to raise its interest rate by 50 basis points to 4.00% in its 10th straight hike, a move mostly expected by investors and economists. But it dropped its pledge to “respond forcefully, as necessary” to signs of further inflationary pressure, adding that inflation had probably peaked.
The pound strengthened right after the decision was announced, with some having expected the central bank to downshift to a 25 basis-point rate hike, but sterling quickly reversed course to hit session lows.
By 1246 GMT, the pound was down 0.8% against the dollar to $1.2267.
The euro rose 0.8% against the pound to 89.55 pence, its highest level since Sept. 29, 2022.
“There seems to be a preference to sell sterling especially against the euro,” said Piotr Matys, senior FX analyst at InTouch Capital Markets, noting that similar price action happened when the BoE last announced changes to policy in December.
“The outlook for the UK economy is still quite challenging compared to the euro zone and U.S., that is why GBP, after knee-jerk reaction, resumed its decline.”
The ECB also announces its latest policy decision on Thursday and is widely expected to raise its interest rates by 50 basis points, while signalling further rate hikes at future meetings.
On Wednesday, the Federal Reserve raised its main interest rate by 25 basis points, a downshift from the 50-basis-point hike at the last meeting. Fed Chair Jerome Powell said “a couple more” rate increases likely lay in store.
Meanwhile, Britain’s 10-year bond yield initially spiked but then fell below levels seen before the decision, and was last down 18 basis points to 3.128%. Yields move inversely to prices.
The trimmed its gains shortly after the policy announcement. It was last trading at the same levels where it was before the BoE decision, up 0.59%.
