Recession fears give sterling a pounding

THE pound slumped amid concerns the UK could fall into recession as a result of inflation.

Sterling fell below $1.24 against the US dollar as price rises stoked fears the UK economy could slow down as consumers spend less.

The fall sent the pound back towards a two-year low of $1.22 reached last week when the UK said GDP dipped in March. The rise in prices, which the Office for National Statistics said hit a 40year high of 9pc last month, was lower than analysts’ predictions.

But it stoked concerns that spending would take a hit and add pressure on the Bank of England to raise interest rates, which could stifle economic growth.

City forecasters are betting rates will rise at least four times this year, while others are predicting rates could even treble.

Analysts at Bank of America expected interest rates to double from their current level of 1pc.

Capital Economics predicted rates will need to hit 3pc before inflation is brought back towards the Bank of England’s 2pc target.

The slide in sterling erased Tuesday’s gains when a drop in UK unemployment to its lowest level in nearly 50 years boosted optimism of recovery.

But the bleak inflation figures quashed hopes of a rebound.

Susannah Streeter, analyst at Hargreaves Lansdown, said rising wages as companies battle to attract workers risked making inflation ‘more embedded’. She said the Bank may have to ‘take more of a softly-softly approach’ to raising interest rates to reduce the risk of a deeper downturn.

Chris Beauchamp, at trading platform IG, said the inflation figure ‘confirms the bind in which the [Bank of England] finds itself, and shows Andrew Bailey was right to be so gloomy’. He added: ‘The [Bank] knows it will struggle to fight inflation with the economy so vulnerable to higher rates and a potential recession.’