Money markets wagers for where interest rates will peak held largely unchanged at 4.75% in the second half of next year, a sign traders are pushing back at the BOE's more cautious stance.
For investors, Thursday's messaging underscored the predicament policymakers face as they balance the need to tighten monetary policy in the face of rampant inflation against the prospect of an economic slowdown. The decision also clashes with the Federal Reserve's commitment to hike by as much as it takes to temper price pressures in the U.S., a key drag on sterling this year.
"The BOE hiked by 75 basis points but revised down its growth and inflation projections, sending a clear signal that the bank rate path expected by the markets ahead of the policy meeting is too high," said Valentin Marinov, head of G-10 currency strategy at Credit Agricole. "The outcome contrasts sharply with the hawkish message from Fed Chair Powell yesterday and could trigger a further drop of the pound-dollar rate spread."
U.K. markets are still looking more stable than in recent weeks as the government has abandoned plans for vast unfunded tax cuts that led to historic moves in both bonds and the currency. While that may take pressure off the need for more aggressive BOE rises in coming months, traders will be looking to an economic statement from the new government due later this month for more details.
"The Bank of England had little choice but to deliver on the market's expectations of a 75-basis-point hike at today's meeting," said Hugh Gimber, global market strategist at J.P. Morgan Asset Management. "Such a large hike may appear unwarranted given signs that U.K. activity is already contracting, but there is scant evidence as yet that the slowdown is sufficient to tame inflation."