Sterling surged to a two-and-a-half year high against the dollar after interest rates were left unchanged in the UK just hours after a jumbo cut in the US.
The Bank of England held its base rate at 5 per cent at noon yesterday as Governor Andrew Bailey insisted it must be ‘careful not to cut too fast or by too much’.
The caution on Threadneedle Street was in stark contrast to the 0.5 percentage point cut by the US Federal Reserve on Wednesday night – larger than the usual 0.25 percentage point move.
Rally: The pound rose above $1.33 for the first time since March 2022 after the Bank of England announced it would hold its benchmark rate at 5%
The pound rose above $1.33 for the first time since March 2022.
The big US rate cut sent global stock markets soaring with the FTSE 100 up 0.9 per cent to 8,329 in London while the Dax gained 1.6 per cent in Frankfurt and the Cac was up 2.3 per cent in Paris.
In New York, the Nasdaq jumped 3 per cent and the Dow Jones Industrial Average and S&P 500 hit record highs.
Gold and oil also made gains with Brent crude up 3 per cent to more than $75 a barrel.
‘Anyone who said size doesn’t matter just needs to take a look at the market reaction to the jumbo rate cut delivered by US central bankers,’ said Danni Hewson, head of financial analysis at AJ Bell. ‘You can almost taste the excitement amongst global investors.’
But while the Fed cut was welcomed on stock markets, its differing stance with the Bank was felt on foreign exchanges.
Sterling made further gains against an already weakening dollar as investors bet the Fed was now firmly on a rate-cutting path.
Though the Bank of England is expected to resume rate cuts before the end of the year, having cut them from 5.25 per cent to 5 per cent last month, the pound rose as high as $1.3314. It also topped €1.19 against the euro.
While analysts noted Bailey’s caution was at odds with the more gung-ho Fed, just one member of the Bank’s nine-strong Monetary Policy Committee (MPC) – Swati Dhingra – voted to follow up last month’s rate cut with another yesterday.
Concerns: Bank of England Governor Andrew Bailey insisted it must be ‘careful not to cut too fast or by too much’
The 8-1 vote in favour of no change was less balanced than the 7-2 or 6-3 expected by some observers, showing how firmly against a cut the MPC was, despite inflation hovering just above the 2 per cent target at 2.2 per cent.
Daniela Sabin Hathorn at Capital.com said the ‘slightly hawkish tone’ at the Bank ‘plays in the pound’s favour’ as higher interest rates tend to bolster currencies.
Predicting sterling could rise as high as $1.35, Nomura economist George Moran said the pound ‘is likely to find significant support especially in the context of the Fed’s cut’.
The pound gave up some of its gains in later trading, however, underlining the uncertainty over the pace of cuts in the US and UK.
And bond yields – key measures of borrowing costs that are linked to the outlook for interest rates – rose either side of the Atlantic.
The yield on ten-year UK gilts rose above 3.9 per cent from 3.75 per cent at the start of the week.
Hubert de Barochez at Capital Economics said: ‘While UK gilt yields might rise a bit further in the near term, we think that they will fall back before long, as the Bank of England eventually delivers more rate cuts than most anticipate.’
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