GBP/USD Edges Lower after Bank of England Signals Smaller Future Rate Hikes

The Bank of England on Thursday raised its benchmark interest rates by 50 basis points as widely expected and dialed back some of its previous gloomy economic forecasts.

The Monetary Policy Committee (MPC) voted 7-2 in favor of a second consecutive half-point rate hike, taking the main Bank rate to 4%, but indicated in its policy statement that smaller hikes of 25 basis points may be in the cards in coming meetings. The two dissenting members voted to leave rates unchanged.

At 12:15 GMT, the GBP/USD is trading 1.2288, down 0.0085 or -0.68%.

Inflation Expected to Decline

Most importantly, the Bank also dropped the word “forcefully” from its rhetoric around continuing to raise rates as necessary to rein in inflation.

“Annual CPI inflation is expected to fall to around 4% towards the end of this year, alongside a much shallower projected decline in output than in the November Report forecast,” the Bank said.

Shorter and Shallower Recession Forecast

Today’s revised economic forecasts projected a shorter and shallower recession than previously expected.

The Bank previously forecast that the U.K. economy was entering its longest recession on record, but GDP unexpectedly grew by 0.1% in November after also exceeding expectations in October, suggesting the impending recession may not be as long or as deep as previously feared.