Pound skids 2% on BoE recession warning, biggest daily fall since 2020

LONDON (Reuters) -Britain's pound and government bond yields fell sharply on Thursday, after the Bank of England raised interest rates to their highest since 2009 but warned that the economy was at risk of recession.

By 1205 GMT, sterling was down 2% against the U.S. dollar at $1.2381, its lowest level since July 2020. . It was set for its biggest one-day fall since March 2020, when the outbreak of COVID-19 wreaked havoc on world markets.

It also slumped 1.3% against the euro to its lowest level since December 2021 at 85.04 pence .

The BoE kept its forecast for economic growth this year at 3.75%, but slashed its forecast for 2023 to show a contraction of 0.25% from a previous estimate of 1.25% growth. It cut its growth projection for 2024 to 0.25% from a previous 1.0%.

BoE Governor Andrew Bailey said the forecasts do not meet the technical definition of recession but of a very sharp slowdown.

"The weakness of the growth outlook means that the inflation outlook is pretty weak too," said Chris Scicluna, head of economic research at Daiwa Capital Markets.

"Markets are right to take a step back and we had thought that scale of tightening priced in was excessive."

UK gilt futures dropped and two-year gilt yields fell more than 14 basis points, the sharpest drop since March 1.

A split also emerged in the Monetary Policy Committee with two members saying the guidance was too strong, given the risks to growth.

"Two members' suggestion that further hikes are not appropriate is resonating," said Neil Jones, head of hedge fund sales at Mizuho in London.

London's FTSE stock index, however, took comfort from a weakening currency. It was last up 1.6% , while UK bank stocks index fell almost 1%.