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

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

The Bank of England kept its base rate at 5 percent at midday yesterday, with Governor Andrew Bailey insisting that “care must be taken not to cut too quickly or too much.”

The caution on Threadneedle Street was in sharp contrast to the US Federal Reserve’s 0.5 percentage point cut late on Wednesday, larger than the usual 0.25 percentage point move.

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

The big US rate cut sent global stock markets soaring: the FTSE 100 rose 0.9 percent to 8,329 in London, while the Dax gained 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 S&P 500 hit record highs.

Gold and oil also rose, with Brent crude up 3 percent to above $75 a barrel.

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

But while the Fed’s rate cut was welcomed in stock markets, its divergence from the Bank was felt in overseas markets.

The British pound continued to advance against an already weakened dollar as investors bet the Federal Reserve was now firmly on track to cut rates.

Although the Bank of England is expected to resume rate cuts before the end of the year, having reduced them from 5.25% to 5% last month, the pound rose as high as $1.3314 and once again exceeded €1.19 against the euro.

While analysts noted that Bailey’s caution contrasted with the Fed’s more hawkish stance, only one member of the Bank’s nine-member Monetary Policy Committee (MPC), Swati Dhingra, voted yesterday to follow last month’s rate cut with another.

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 strongly the MPC opposes a cut, even though inflation is running just above the 2 percent target at 2.2 percent.

Capital.com’s Daniela Sabin Hathorn said the Bank’s “slightly hawkish tone” “plays into the pound’s favour” as higher interest rates tend to strengthen currencies.

Predicting that sterling could rise to $1.35, Nomura economist George Moran said the pound was likely to “find significant support, especially against the backdrop of Fed tapering.”

However, the pound gave back some of its gains in after-hours trading, underscoring 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 on both sides of the Atlantic.

The yield on 10-year British government bonds rose above 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 could rise a bit further in the near term, we think they will fall back before long as the Bank of England eventually implements more rate cuts than most anticipate.”