LONDON: Sterling strengthened against a slightly weaker dollar on Tuesday, with the outlook for UK interest rates in focus after a Bank of England official flagged a further increase.

BoE Deputy Governor Dave Ramsden told Reuters the bank will probably have to raise interest rates further from their current 14-year-high to tackle inflation pressures that are gaining a foothold in Britain’s economy.

The central bank lifted rates by a large 50 basis points last week but warned of an incoming recession.

By 0918 GMT, sterling was up 0.4% versus a slightly weaker dollar to $1.2128.

Against the euro, the pound was largely steady at 84.45 pence.

The bank last week raised interest rates to 1.75% from 1.25%, the sixth hike since late 2021, and warned of a recession by the end of the year that could last until 2024.

Sterling nears April high vs euro ahead of BoE meeting

Against this murky backdrop, the race to succeed Boris Johnson as Britain’s next Prime Minister is also providing an overhang of uncertainty for sterling.

“One of the big uncertainties hanging over GBP is what the new government’s new fiscal plans will be. Clearly there is likely to be significant fiscal loosening, but exactly what form that takes is up for debate,” said Mizuho senior economist Colin Asher.

Taking into consideration technical factors and the prospect of a large fiscal boost in the autumn, the depth of the recession is likely to be much shallower than the BoE’s main scenario suggests, said Asher, but he added the outlook is not good.

“If bills really are going to go up by as much as people are currently suggesting, there will be significant income support at the lower end of the scale,” he said.

GDP figures on Friday will provide the next key reading on the state of Britain’s economy. U.S. inflation data on Wednesday will also be watched closely in currency markets as investors assess whether another 75 bps rate hike from the Federal Reserve is likely in September.