Pound hits two-year high as Bank keeps interest rates at 5% – and stocks rise as investors cheer Fed’s massive rate cut

Sterling rose to a two-and-a-half-year high against the dollar after interest rates in the UK were left unchanged just hours after they were cut sharply in the US.

The Bank of England kept its base rate at 5 percent at noon yesterday as Governor Andrew Bailey urged the bank to be “careful not to cut too much or too quickly”.

The caution on Threadneedle Street was in stark contrast to the US Federal Reserve’s 0.5 percentage point interest rate cut on Wednesday evening – a cut larger than the usual 0.25 percentage point.

The pound rose above $1.33 for the first time since March 2022.

The big rate cut in the US caused global stock markets to rise. The FTSE 100 rose 0.9 percent to 8,329 in London, the DAX rose 1.6 percent in Frankfurt and the CAC rose 2.3 percent in Paris.

In New York, the Nasdaq rose 3 percent and the Dow Jones Industrial Average and the S&P 500 reached record highs.

Gold and oil also posted gains, with Brent crude rising 3 percent to more than $75 a barrel.

“Anyone who says size doesn’t matter need only look at the market reaction to the massive rate cut by US central bankers,” said Danni Hewson, head of financial analysis at AJ Bell. “You can almost taste the excitement among global investors.”

But while the Fed’s rate cut was welcomed on stock markets, the difference in attitude towards the Bank was felt on foreign exchanges.

The pound rose further against the already weaker dollar as investors bet the Fed was now moving decisively to cut rates.

Although the Bank of England is expected to resume interest rate cuts before the end of the year after cutting them from 5.25 percent to 5 percent last month, the pound rose to $1.3314. It also reached €1.19 against the euro.

Analysts noted that Bailey’s caution was at odds with the Fed’s more enthusiastic stance, but yesterday only one member of the bank’s nine-member Monetary Policy Committee (MPC) – Swati Dhingra – voted to follow up last month’s rate cut with another.

The 8-1 vote for no change was less balanced than the 7-2 or 6-3 votes some observers had expected, showing how strongly the MPC opposes a cut despite inflation remaining just above the 2 percent target at 2.2 percent.

Capital.com’s Daniela Sabin Hathorn said the bank’s “slightly hawkish tone” is “playing in the pound’s favour” as higher interest rates typically strengthen currencies.

George Moran, an economist at Nomura, predicts that the pound could rise as high as $1.35, saying that the pound is “likely to find significant support, particularly in the context of the Fed’s rate cut.”

However, the pound gave up some of its gains in later trading, underscoring uncertainty over the pace of price cuts in the US and UK.

And bond yields – key measures of borrowing costs that tie to the outlook for interest rates – rose on both sides of the Atlantic.

The yield on 10-year British government bonds rose to over 3.9 percent from 3.75 percent at the start of the week.

Hubert de Barochez of Capital Economics said: ‘While UK government bond yields may rise a little further in the near term, we think they will soon fall again as the Bank of England ends up cutting rates more than most expect.’