Sterling slips as BoE delivers big rate hike but warns of long recession

LONDON (Reuters) -Sterling fell on Thursday after the Bank of England raised interest rates by the most in 27 years but warned that a long recession is on its way with inflation seen topping 13%.

The pound fell 0.5% to $1.2090, having traded 0.3% higher at $1.2184 just before the BoE decision was announced.

The BoE warned that Britain was facing a recession as it rose its benchmark rate by 50 basis points (bps) to 1.75% in an attempt to curb inflation.

Sterling fell 0.6% against the euro to 84.20 pence.

“The pound is falling despite a 50 bp hike by the BoE. The reaction mostly boils down to the BoE’s pessimistic outlook for the UK economy, with a recession now expected to start in the forth quarter and to extend through next year,” said Francesco Pesole, FX strategist at ING.

“This notion is likely having markets doubt the BoE will be able to keep tightening policy at a sustained rate despite expectations for stickier inflation,” he added.

The UK’s blue chips FTSE 100 share price index initially dipped following the BoE’s decision but quickly recovered as the pound weakened. It was up 0.4% after touching its highest in around two months.

UK bank stocks eased from highs and were little changed on the day, while a UK-domestically focused index cut some earlier gains and was last up 0.6% on the day.

British gilt yields were down 5 basis points on the day at 1.867%. They had stood at 1.91% before the decision.

Euro zone bond yields extended their falls with Germany’s 10-year yield down 3 bps at 0.84%.

(Reporting by the London Markets TeamWriting by Joice AlvesEditing by Dhara Ranasinghe and Frances Kerry)