LONDON: The pound regained some ground on Friday after dropping on Thursday when the Bank of England cut interest rates and halved its growth forecast for the year.

Sterling was last up 0.16% at $1.2458 on Friday, after falling 0.54% the previous day.

The pound fell as much as 1.1% after the Bank of England cut rates to 4.5% and slashed its growth forecast for this year to 0.75%, half the previous estimate.

It regained some ground when BoE Governor Andrew Bailey told Bloomberg that markets should not read too much into a switch by some policymakers to vote for deeper rate cuts.

Investors struggled to know how to react to the Bank’s forecasts, which also said inflation would now peak at 3.7% this year - sharply above a previous forecast of 2.8%.

British bond yields, which move inversely to prices, initially fell but ended the day higher.

“The Bank of England has a tough road ahead if it is to avoid potential stagflation,” said Michael Pfister, FX analyst at Commerzbank.

“I can fully understand why market participants are concerned about the new forecasts and are now pricing in sharper rate cuts.

“However, the Bank of England has often surprised us in recent years. I would not be surprised to see another hawkish turn in March.”

Traders on Friday were expecting around 60 basis points on further BoE rate cuts this year, money market prices showed , little changed from before Thursday’s decision.

The BoE has cut three times since August, when rates stood at 5.25%.

The euro was down 0.19% against the pound at 83.34, after rising 0.39% on Thursday.