Pound falls after BoE raises rates but sounds less sure about future hikes

LONDON (Reuters) -The British pound dropped on Thursday after the Bank of England raised interest rates but sounded less certain about the pace of further tightening to combat soaring inflation.

Sterling had gained before the BoE announced its Monetary Policy Committee had voted 8-1 to raise rates 25 basis points to 0.75%. The one dissenter voted to keep rates on hold.

Some traders had been expecting one or two policymakers to vote for a bigger 50 basis points hike, and the language the MPC used – saying “some further modest tightening might be appropriate in the coming months” – was less hawkish than anticipated.

“In contrast to both the U.S. Federal Reserve and the European Central Bank, the Bank of England delivered a relatively dovish message to investors today,” said Ed Hutchings, head of rates at Aviva Investors, adding that “there was more of a focus on slower growth and its impact on households going forward”.

The pound dropped more than a cent to $1.3088, down 0.4% on the session after earlier reaching as high as $1.3211. It later recovered to $1.3160 as the dollar sold off broadly.

Against the euro, sterling was last at 84.45 pence, 0.6% weaker on the day after trading higher versus the single currency before the BoE announcement.

The Ukraine war and spike in commodity prices have made the BoE’s job harder as it confronts an inflation rate already running at more than double its 2% target and economic growth that is likely to slow given the squeeze on consumers’ living standards and the impact of the conflict.

The Federal Reserve on Wednesday gave a hawkish signal as it raised rates for the first time since 2018 and flagged the need for a rate rise at every one of 2022’s remaining meetings.

The BoE had already hiked rates twice since December.

Money markets scaled back their rate hike bets – futures showed investors were expecting the Bank Rate to be a little below 2.0% by December at 1220 GMT. Before the BoE announcement, futures were fully pricing in a rate of 2.0% by year-end.

Some investors expected the BoE to move harder and faster in tightening policy than the Fed, especially given the UK economy is not as sensitive to rate rises as it used to be with many households fixing their mortgage rates.

“Structurally the UK has had higher inflation than others as sterling tends to weaken in volatile markets so the UK tends to import inflation,” said Justin Onuekwusi, portfolio manager at LGIM before the BoE announcement.

The pound had been falling in recent weeks as investors, worried about inflation, tightening monetary policy globally and the war in Ukraine, sold riskier currencies and bought the dollar.

Against the euro, sterling has performed far better, as the single currency has been damaged by concerns the war in Europe’s east will hurt the regional economy.

(Reporting by Tommy Reggiori WilkesAdditional reporting by Sujata RaoEditing by Barbara Lewis, Mark Heinrich and Jonathan Oatis)