Pound hits highest level since March 2022 after Bank holds rates

The pound hit a two-year high against the dollar, breaking the $1.33 level, after the Bank of England held interest rates steady on Thursday and promised only “gradual” monetary loosening in the coming months.

Sterling rose by as much as 0.7 per cent against the dollar, reaching the $1.331 mark — its highest level since March 2022 — after borrowing costs were left unchanged at 5 per cent and the US carried out a bumper half a percentage point cut to interest rates on Wednesday.

High interest rates support the value of a currency, as traders buy lower-rate currencies to invest in higher-rate environments. Sterling also gained 0.3 per cent against the euro to hit €1.19, its highest level since July.

The UK’s cutting cycle has now fallen behind the US and the eurozone, both of which have loosened monetary policy by half a percentage point, compared with the quarter-point cut from the monetary policy committee in August.

Traders expect only one more UK rate cut in November this year. The US Federal Reserve and the European Central Bank are both on course to cut faster, a divergence that should help to support the pound. Analysts at Nomura, the investment bank, said the pound was on course to hit $1.35, its highest since January 2022.

After Thursday’s decision to hit pause, the MPC said that it would adopt “a gradual approach to removing policy restraint”. Inflation has fallen from last year’s double-digit highs to 2.2 per cent in recent weeks, which is within a shade of the Bank’s 2 per cent target, but it is expected to rise to 2.5 per cent by the end of the year.

The decision to keep rates unchanged pushed down the value of UK government bonds, lifting yields on 10-year gilts by four basis points to 3.88 per cent. Bond yields rise when the price falls. Stocks on the FTSE 100 and the FTSE 250 rallied to close up 0.9 per cent and 1.6 per cent respectively.

Nick Andrews, senior FX strategist at HSBC, said that the pound’s recent gains were “unsustainable” and that sterling would weaken against the dollar and other major currencies as the Bank is eventually forced to cut rates more aggressively.

“Until then the outlook for the UK economy is likely to weaken relative to the US and this will weigh on the pound/dollar,” he said.