The pound continued its downward trajectory on Friday, before slightly recovering, after slumping to two-year lows as the Bank of England (BoE) hiked borrowing costs to a 13-year high and warned of a possible recession.

Sterling was trading 0.05% lower against the dollar (GBPUSD=X) at $1.2353, and 0.45% down against the euro (GBPEUR=X) at €1.1673 — its lowest since June 2020.

The currency was also knocked as the UK faces an economic downturn, with Threadneedle Street no longer set to raise interest rates as fast as previously forecast.

The central bank said the British economy was set to contract sharply in the last quarter of the year when the energy price cap is lifted again, following a sharp downgrade by its analysts.

Output has been predicted to collapse by close to 1% in the final three months of 2022.

Read more: Is the UK heading into a recession?

Bank analysts had also previously forecast for growth of 1.25% in 2023, but are now warning that GDP is expected to shrink by 0.25% next year. This would mark the second annual contraction in just four years.

On Thursday, the pound suffered its worst day since March 2020, when the pandemic caused markets to crash, falling nearly two and half cents on the back of the news.

BoE governor Andrew Bailey said the forecasts did not meet the technical definition of recession but that of a very sharp slowdown.

“Sterling has reacted to the bank’s lack of clarity, and indeed the threat of a UK recession, in a negative fashion and is currently back trading below the 1.24 level versus the US dollar,” Matthew Ryan, senior market analyst at Ebury, said.