Sterling slips after BoE hints rates near peak

© 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 fell against the 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.

"Since the November monetary policy report we've seen the first signs that inflation has turned the corner," BoE Governor Andrew Bailey said in a speech following the rate hike.

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 then quickly reversed course to hit session lows.

By 1435 GMT, the pound was down 0.6% against the dollar to $1.2296. It dropped as low as $1.2265 after the decision.

"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," Piotr Matys, senior FX analyst at InTouch Capital Markets, said.

The ECB also raised its interest rates by 50 basis points on Thursday and pencilled in at least one more hike of the same magnitude next month, but left its options open further ahead, suggesting a pause or a smaller rate rise after March.

Against the euro, the pound was little changed at 88.80 pence, having earlier hit a four-month high of 89.55 pence after the BoE decision but before the ECB announcement.

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.

Britain's 10-year bond yield was last down 22 basis points to 3.091%. Yields move inversely to prices.

"The reduction in UK rates weighed on the pound, which remains wounded by bleak economic fundamentals and now a less favourable yield pick-up," Simon Harvey, head of FX analysis at Monex Europe, said.

"The decline in the pound in response to the BoE's latest rate decision compounds our near-term view of GBPUSD depreciating to 1.22 over the coming month, with sterling underperformance also expected to be visible against the euro," he added.