LONDON, May 6 (Reuters): The Bank of England sent a stark warning that Britain risks a double-whammy of a recession and inflation above 10 per cent as it raised interest rates on Thursday to their highest since 2009, hiking by quarter of a percentage point to 1 per cent.
The pound fell by more than a cent against the US dollar to hit its lowest level since mid-2020, below $1.24, as the gloominess of the BoE's new forecasts for the world's fifth-largest economy caught investors by surprise.
They also trimmed bets on the central bank hiking rates aggressively this year. Short-dated British government bond yields slid sharply.
The BoE's nine rate-setters voted 6-3 for the rise in Bank Rate from 0.75 per cent, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase to 1.25 per cent.
Economists polled by Reuters had forecast an 8-1 vote to raise benchmark borrowing costs to 1 per cent, with one policymaker opposing a hike.
Central banks are scrambling to cope with a surge in inflation that they described as transitory when it began with the post-pandemic reopening of the global economy, before Russia's invasion of Ukraine sent energy prices spiralling.
The BoE said it was also worried about the impact of renewed Covid-19 lockdowns in China which threaten to hit supply chains again and add to inflation pressures.
But policymakers around the world are also trying to avoid sending their economies into a slump.
On Wednesday, the US Federal Reserve raised rates by a half-point to a range of 0.75-1.0 per cent, its biggest increase since 2000. Chair Jay Powell said more such hikes were on the table.
But Powell said the US economy was performing well, a contrast with Bailey's more downbeat assessment.
The BoE's rate rise was its fourth since December, the fastest pace of policy tightening in 25 years.
