Sterling tumbles after BoE opts for cautious rate hike

(Recasts following BoE decision) LONDON, June 16 - Sterling fell sharply on Thursday, after the Bank of England (BoE) raised interest rates by 25 basis points, confounding forecasts by some market participants of a bigger hike to fight soaring inflation. The pound was last at $1.2062 against the dollar, down 0.9% on the day and compared to $1.2165 just before the BoE decision.

Sterling fell sharply on Thursday, after the Bank of England (BoE) raised interest rates by 25 basis points, confounding forecasts by some market participants of a bigger hike to fight soaring inflation.

The pound was last at $1.2062 against the dollar, down 0.9% on the day and compared to $1.2165 just before the BoE decision. Against the euro, sterling fell to 86.29 pence and was down 0.5%. Expectations the BoE would hike by more than 25 basis points had grown after the U.S. Federal Reserve on Wednesday delivered its biggest hike since 1994 and the Swiss National Bank then shocked markets on Thursday with a large surprise hike of its own.

The BoE instead opted for a smaller increase, albeit it was the central bank's fifth consecutive hike as it tries to balance fighting rising prices without hurting Britain's embattled economy. "Once again the BoE looks like the timid cat next to the Fed's roar against inflation, with just a 25bps hike," said Chris Beauchamp, chief market analyst at IG Group.

The BoE board's 6-3 vote in favor of a 25 basis point hike "...means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar, and $1.20 will likely be tested once more," he added. The benchmark FTSE index fell 2.41%, while 10-year UK government bond yields rose to 2.55%. GB10YT=RR

Britain's growth prospects are seen among the weakest for rich countries in 2023, and there is uncertainty over how fast the BoE can tighten policy this year to tame inflation without further hurting the economy. The Sterling has weakened around 11% against a robust dollar since the start of the year amid the grim outlook for the economy and political instability in Britain.