LONDON (Reuters) -Britain’s pound and authorities bond yields fell sharply on Thursday, after the Financial institution of England raised rates of interest to their highest since 2009 however warned that the financial system was prone to recession.

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

It additionally slumped 1.3% towards the euro to its lowest degree since December 2021 at 85.04 pence .

The BoE stored its forecast for financial progress this yr at 3.75%, however slashed its forecast for 2023 to point out a contraction of 0.25% from a earlier estimate of 1.25% progress. It reduce its progress projection for 2024 to 0.25% from a earlier 1.0%.

BoE Governor Andrew Bailey mentioned the forecasts don’t meet the technical definition of recession however of a really sharp slowdown.

“The weak spot of the expansion outlook signifies that the inflation outlook is fairly weak too,” mentioned Chris Scicluna, head of financial analysis at Daiwa Capital Markets.

“Markets are proper to take a step again and we had thought that scale of tightening priced in was extreme.”

UK gilt futures dropped and two-year gilt yields fell greater than 14 foundation factors, the sharpest drop since March 1.

A cut up additionally emerged within the Financial Coverage Committee with two members saying the steering was too sturdy, given the dangers to progress.

“Two members’ suggestion that additional hikes aren’t acceptable is resonating,” mentioned Neil Jones, head of hedge fund gross sales at Mizuho in London.

London’s inventory index, nevertheless, took consolation from a weakening forex. It was final up 1.6% , whereas UK financial institution shares index fell nearly 1%.