(Bloomberg) --

Anyone hoping the Bank of England’s interest-rate hikes will rescue the British pound are likely to be disappointed.

The UK’s currency was little changed against the US dollar Wednesday, even as bond yields jumped after a higher-than-expected inflation reading drove traders to price in more aggressive rate hikes from the central bank. 

Higher interest rates frequently bolster a currency, as has been the case this year with the dollar. But with annual consumer price increases surging to a 40-year high of 10.1%, the scale of the BOE’s efforts to rein it in risk driving the economy into a recession. In a note to clients, Bank of America Corp. said the BOE may not tighten monetary policy enough to support the currency, a sentiment echoed by other analysts.

“A more hawkish Bank of England policy path isn’t necessarily supportive for the pound, as it comes at the expense of future growth conditions,” Simon Harvey, head of FX analysis at Monex Europe, wrote in a note.

The BOE stared raising interest rates in December and has warned that tighter monetary policy is likely to take a toll. Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not due to rising cost pressures. The BOE expects a recession to start in the fourth quarter, lasting into the early part of 2024.

After the consumer price report, money markets started pricing in nearly two full percentage points of BOE rate hikes by March, which would take the key rate from 1.75% to 3.75%. 

“When rate moves don’t support a currency, it is starting to behave somewhat like an emerging market currency, a dangerous signal for the sterling,” said John Hardy, the head of FX strategy at Saxo Bank.

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