(Bloomberg) --

The pound posted its biggest loss since early October and long-dated bonds tumbled after the Bank of England signaled it would likely raise rates less than investors expect, stoking fears the tightening campaign won’t be sufficient to tame inflation.

Sterling fell as much as 2.1% to a low of $1.1157, while the yield on 30-year bonds -- among the most sensitive to the outlook for consumer prices -- soared more than 20 basis points at one point. The BOE said a lower peak rate than what was priced by markets would be enough to get inflation running at over 10% back to target. It hiked its key rate by 75 basis points to 3% on Thursday, as widely expected.

Money markets wagers for where interest rates will rise to this cycle held largely unchanged at 4.75%, a sign traders were pushing back at the BOE’s more timid stance.

For investors, the messaging underscored the predicament policy makers face as they balance the need to tighten monetary policy 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 US, a key drag on sterling this year.

Jumbo UK Rate Hike Seen ‘as Dovish as Can Be’ as BOE Pushes Back

“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 SA. “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.”

UK markets are 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 UK activity is already contracting, but there is scant evidence as yet that the slowdown is sufficient to tame inflation.”

--With assistance from Alice Gledhill and James Hirai.

(Adds context on inflation outlook in second paragarph.)

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