- Sterling hit a low of 1.2393 against the dollar early Thursday afternoon London time, its lowest level since Jul. 1, 2020.
- It comes after Bank of England policymakers voted for a fourth consecutive rate hike since December at a time when millions of U.K. households are grappling with skyrocketing living costs.
- But policymakers warned that GDP growth is expected to slow sharply and inflation could peak at 10% this year.
The British pound on Thursday was set for its largest daily drop since the onset of the coronavirus pandemic, after the Bank of England warned of a sharp growth slowdown in the U.K. economy.
In a widely expected move, policymakers at the Bank of England voted for a fourth consecutive rate hike since December. But policymakers also warned that GDP growth is expected to slow sharply and inflation could peak at 10% later this year.
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"We are walking this very narrow path now. The proximate reason for raising bank rate at this point is, it's not only the current profile of inflation, what is to come and of course what that could mean for inflation expectations to come, but the risks as well," BOE Governor Andrew Bailey said Thursday at a press conference.
In its updated forecasts, the Bank said it now expects GDP to slump in the final three months of this year. Bailey said the U.K. was set for a "very sharp slowdown" but added that it might not meet the criteria for a technical recession — two straight quarters of contraction.
10-year gilt yields, the country's sovereign benchmark, were near a session low of 1.85%, and the FTSE 100 stock market was up 1.6% — on pace for its best day since March 14.
"We are witnessing a clear depreciation of sterling during 2022 which is placing it as the third-worst performing major currency," Jesús Cabra Guisasola, a senior associate for global capital markets at Validus Risk Management, said in a flash research note.
"It looks like MPC members are now more concerned about the prospect for the British economy which is signaling a clear path to stagnation."
The Bank's Monetary Policy Committee approved a 25-basis point increase by a majority of 6-3, taking the base interest rate up to 1%. The Bank said the members in the minority preferred to increase interest rates by 0.5 percentage points to 1.25%.
Like many central banks around the world, the BOE is tasked with steering the economy through an inflation surge that has been exacerbated by Russia's unprovoked onslaught in Ukraine.
—CNBC's Sam Meredith contributed to this article.