The pound (GBPUSD=X) extended losses on Thursday as traders asses the Bank of England’s 0.50 percentage point interest rate lift following the Federal Reserve’s supersized rate hike.
Sterling fell as much as 0.3% to $1.123 against the dollar in early – the lowest level in 37 years.
It made up some ground following the BoE’s biggest rate hike since since 2008, trading at $1.130. The dovish move takes the key rate from 1.75% to 2.25%.
Read more: Bank of England hikes UK interest rates by 0.5% to 14-year high
Thursday’s slump means that the pound is down nearly 17% so far this year, surpassing the 16% wipeout it suffered in 2016 following the Brexit referendum, and its worst year since the financial crash in 2008, when it lost 26%.
It comes as the greenback surged to a fresh 20-year high against its peers after the Federal Open Market Committee lifted its key rate by 0.75 percentage points for the third time in a row and projected further increases in borrowing costs in an effort to tame inflation.
The BoE’s Monetary Policy Committee is expected to follow suit and lift the Bank Rate rate by 75 basis points or 50bps at the least later on Thursday, according to market consensus.
Analysts at investment bank JPMorgan (JPM) see it is a “close call” as to whether the central bank increases rates by 0.5% or 0.75%, taking the rate to 2.25% and 2.5% respectively.
Read more: Interest rates: UK braces for possible biggest hike in 33 years
A smaller rate hike could pile more pressure on the pound as investors often chase higher rates.
Wednesday’s August public finance numbers, showing the UK borrowed almost twice as much as expected, has also added to the pressure.
Russ Mould, investment director at AJ Bell, said: “Governor Andrew Bailey and his colleagues made a total mess of it by arguing inflation would prove transitory and insisting policy was ‘data dependent’.
“That leaves them catching up and investors in shares and bonds and traders in currencies could be forgiven for thinking that the Old Lady of Threadneedle Street may now overcompensate and tighten policy too much at a time when the economic outlook is already fragile.
“Unlike the Fed, which has a dual mandate to manage both inflation and employment, the Bank of England has but one mission, namely to keep inflation around the 2% level.
“As such, if push comes to shove, the MPC should be prepared to risk a recession to keep prices broadly stable, even if the new government is unlikely to be too thrilled about the prospect of any economic downturn as it seeks to curry favour with the electorate ahead of the next general election, which must take place by early 2025 at the latest.”
Watch: How does inflation affect interest rates?
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