Pound recovers after sliding on Bank of England's UK recession warning

Pound and U.S. dollar banknotes
Threadneedle Street said that Britain is bracing for the longest recession since the 1920s after announcing its largest interest rate hike in 33 years. The pound fell on the back of the news on Thursday but started to recover on Friday. Photo: Dado Ruvic/Reuters

The pound (GBPUSD=X) managed to recover against the dollar on Friday, climbing 1.4%, after it hit $1.116 the session before — its lowest level for two weeks.

Sterling suffered yet another dismal day on Thursday following a stark warning from the Bank of England (BoE) that an incoming UK recession could last as long as two years. However it was trading at $1.1315 at the time of writing, but was 0.5% down against the euro (GBPEUR=X).

It came as Threadneedle Street said that Britain is bracing for the longest recession since the 1920s after announcing its largest interest rate hike in 33 years. It increased rates by 75 basis points to 3% to combat soaring inflation, which currently stands at a 40-year high of 10.1%.

The BoE believes that the UK economy could fall into eight consecutive quarters of negative growth if current market expectations prove correct. It would be the longest period of uninterrupted decline that the nation has experienced for around a century.

However, it would be a milder recession than in previous times.

From its highest to lowest point, gross domestic product (GDP) is expected to drop 2.9%, a much smaller decrease than the 6.3% drop seen during the 2008 financial crisis.

This sent the pound sharply lower against the US greenback, which fell 1.9% at one point on Thursday.

Naeem Aslam, chief market analyst at AvaTrade, said at the time: "The pound has lost more momentum on the back of the BoE’s decision. A typical textbook trade is out of the window because currencies usually move higher when a central bank increases rates.

"In the UK, it is mainly about fear of recession and the fact that the BoE sees recession prolonging for two years; it means tough times are ahead, and we are going to see the economy, markets, and the currency tanking in the coming months."

Watch: What is a recession and how do we spot one?

The incoming recession, and pressure on real incomes is set to cost the majority of households £800 a year.

The poorest 10% are expected to be hit harder, because they spend a higher proportion of their monthly budget on utilities and food, where prices have been accelerating faster than other areas.

“These disheartening messages come as the Bank of England chief has spoken out about the perils that come along with the UK’s tight labour market, which puts the nation’s inflationary conundrum at an elevated level, when compared with other countries,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said.

Read more: Interest rates: What the Bank of England's biggest hike in 33 years means for you

“The tight labour market creates significant inflationary pressure, even though the Bank of England sees price rises falling below 10% in the second quarter of next year, with the issues stemming from the sharp contraction in the UK labour force since just before COVID.

“There’s also heightened uncertainty when it comes to assessing the Bank’s forecasts, with the government’s fiscal plans not being laid out until 17 November. Until we have those pieces of the puzzle, the economy’s trajectory is very hard to map.”

The pound also gained on dollar weakness after the release of US jobs market data that confirmed a trend of slowing employment gains and wage growth.

The American economy added 261,000 jobs in October, beating the consensus expectation of 193,000, while September's figure was revised higher to an impressive 315K.

Watch: How does inflation affect interest rates?