Pound on track for worst day in a year as BoE holds interest rates

·3 min read
Close-up of British bank notes
The pound sank against the dollar as traders digested the news the Bank of England would hold rates again at 0.1%. Photo: Getty

The pound tumbled sharply on Thursday after the Bank of England (BoE) decided to hold interest rates at an all-time low of 0.1%.

Sterling was more than 1.4% lower against the dollar (GBPUSD=X), trading at $1.3495, while it was 0.8% down against the euro (GBPEUR=X) at €1.1693. 

The Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain the bank rate as it is, despite widespread anticipation it would increase the rate to 0.25%.

Analysts said that they expect the rate to be hiked to pre-pandemic levels in the next 18 months as the economy resumes a more steady course. However, markets had already priced in a hike in recent weeks.

"It was a surprisingly dovish split in today’s rate decision. The Bank of England had to weigh up the risks to the economy stemming from higher price levels against the risk of derailing the economic recovery and clearly it has decided to favour the latter," Victoria Scholar, head of investment at interactive investor, said. 

"The pound has now shed 2% against the greenback since the peak in October, reversing more than 60% of the gains seen since the trough at the end of September. 

The pound sank against the dollar as traders digested the news the Bank of England would hold rates again at 0.1%. Chart: Yahoo Finance UK
The pound sank against the dollar as traders digested the news the Bank of England would hold rates again at 0.1%. Chart: Yahoo Finance UK

Meanwhile, stocks in Europe continued to push ahead after a strong session on Wall Street last night after the US Federal Reserve announced it was unwinding its stimulus programme.

In London, the FTSE 100 (^FTSE) closed 0.4% higher, with house builders boosted by the news, while the CAC (^FCHI) also jumped 0.5% in Paris, and the DAX (^GDAXI) was 0.4% higher in Frankfurt.

America’s central bank began scaling back its stimulus package, which was set up to weather the economic headwinds caused by the pandemic, by cutting its $120bn (£88bn) per month bond purchases by $15bn per month.

Fed officials had been debating for months about whether to taper the stimulus programmes, and when. It left interest rates unchanged.

“In light of the substantial further progress the economy has made toward the committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases,” the policy-setting Federal Open Market Committee said in its updated policy statement.

The taper will begin “later this month” and will continue at that $15bn pace through December, although the FOMC clarified it could change the pace of taper as needed.

Watch: Will interest rates stay low forever?

Across the pond, the S&P 500 (^GSPC) rose 0.2% by the time of the European close, and the tech-heavy Nasdaq (^IXIC) was 0.6% higher, paving the way for its ninth consecutive session of gains. The Dow Jones (^DJI) however, edged 0.2% lower.

Data released on Thursday revealed that the number of Americans filing new claims for unemployment benefits fell to the lowest level in nearly 20 months last week.

Initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 269,000 for the week ended 30 October, the Labour Department said. This was the lowest level since the middle of March last year. 

Claims have now declined for five straight weeks.

Read more: Federal Reserve to begin slowing its pace of asset purchases this month

Asian stock markets advanced overnight on Thursday, with the Nikkei (^N225) climbing 0.9% to its highest in a month in Tokyo.

The Hang Seng (^HSI) rose 0.7% and the Shanghai Composite (000001.SS) was 0.8% higher despite concerns of a spike in new coronavirus cases in China, which threatens to curb consumer spending in an already slowing economy.

Watch: What is inflation and why is it important?

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