(Bloomberg) -- The pound dropped and UK bonds extended gains on speculation the Bank of England is nearing an end of its hiking cycle.
Sterling fell as much as 0.8% to an intraday low of $1.2280 as policy makers lifted the rate by half a point to 4%, the highest since 2008. The yield on 10-year gilts was down around 17 basis points to 3.14%.
The BOE dropped its guidance that it would respond “forcefully” if necessary, even as it highlighted risks to the inflation outlook. While the market had accounted for the possibility of a dovish move — traders hadn't fully priced in a half-point hike at this month's meeting — the shift in the outlook was seen as the highlight of the decision.
“The language of the policy statement has further pointed at less aggressive hikes ahead,” said Valentin Marinov, head of G-10 currency research at Credit Agricole. “The risk for sterling is that today's decision would be perceived as a dovish hike and thus less supportive for the pound.”
Sterling was already lagging peers heading into the decision. The euro-pound cross is trading around its highest level since September, when the UK currency tanked in the aftermath of former prime minister Liz Truss's economic plans. Gilts, meanwhile, have outperformed so far this year amid concern over the outlook for economic growth.
Money markets briefly upped bets on where the BOE's key rate would peak during this tightening cycle before erasing the move, keeping wagers on the terminal rate at around 4.4%.
The BOE's decision follows the Federal Reserve's quarter-point rate increase on Wednesday as it slows down its tightening cycle. The European Central Bank is expected to raise its key rate by a half point to 3% later Thursday.
Investor focus is now on BOE Governor Andrew Bailey and his colleagues' comments at a press conference in London.
“The focus is turning to the guidance which may well signal that this is it for this hiking cycle,” said Antoine Bouvet, a senior rates strategist at ING. “Next steps will depend on data but at the very least, this means the curve should price out the remnant of hawkish bias it has kept since last summer.”
(Adds Credit Agricole's comment in fourth paragraph, updates prices throughout.)
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