The pound hit a five-week low against the dollar (GBPUSD=X) on Friday, continuing its sell-off after the Bank of England (BoE) left interest rates unchanged on Thursday.
Sterling dropped by 0.7 of a cent or 0.5% today, to $1.343, adding to the previous session’s heavy losses of almost two cents. It is also currently 0.2% down against the euro (GBPEUR=X) at €1.166.
The move puts the currency at its lowest level against the dollar since late September, when it hit the weakest levels this year.
It was knocked by comments from BoE governor Andrew Bailey this morning, who said that UK households are already starting to feel the impact of rising prices.
“Inflation is clearly something that bites on people’s household income,” he told the BBC’s Radio 4 Today Programme. “I’m sure they’re already feeling that in terms of prices that are going up.”
Inflation in the UK is currently 3.1%, ahead of the Bank of England's 2%. The BoE predicted that inflation will be heading to 5% early next year, its highest level in a decade.
On Thursday, Threadneedle Street surprised the markets by keeping UK interest rates at record lows of 0.1%, to see how the jobs market manages with the end of the furlough scheme.
“The labour market looks tight, but the missing piece of evidence is what has happened to unemployment since the scheme finished,” Bailey told the broadcaster.
Watch: What is inflation and why is it important?
The Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain the Bank rate as it is.
Markets had priced in a 15 basis point rise in rates, but the MPC defied expectations.
"For sterling, the decision was akin to a trap door through which the pound tumbled. We have pointed out for many weeks now that these rate expectations were really the only thing holding the pound up and with them either gone or severely weakened, GBP is looking for what else can support it,” Jeremy Thomson-Cook, chief economist at Equals Money, said.
“In a winter of Covid-19, Brexit supply and legal issues, higher energy costs and an uncertain employment outlook, there’s not too much to be banging the drum on sterling for.
“It will still likely outperform the euro in the coming weeks but those looking for strong material gains against the USD may have to reappraise their thinking.”
Watch: Will interest rates stay low forever?