Pound Hits 2-Year High as Bank of England Holds Interest Rates at 5%

The Bank of England kept interest rates at 5% during its 19 September meeting. This decision was widely expected by economists. The pound rose strongly against the dollar and euro, while the FTSE 100 dipped slightly. European stocks went up after the Federal Reserve’s recent rate cut.

Committee’s Decision and Bond Purchases

Eight members of the Bank’s Monetary Policy Committee voted to hold the rates, with only one member, Swati Dhingra, suggesting a 0.25% reduction. The Committee also voted to reduce UK government bond purchases by £100 billion over the next year, bringing the total to £558 billion.

Inflation and Economic Outlook

In August, the Bank lowered interest rates by 0.25% as inflation dropped to 2% in July. Despite pressure from the Federal Reserve’s sharp rate cut the day before, the Bank of England kept rates steady, citing no major changes in the economic outlook. “Inflation is easing, and the economy is following forecasts,” the Bank stated. It expects economic growth to pick up to around 0.3% per quarter in the second half of the year.

UK Inflation on the Rise

The UK inflation rate rose to 2.2% in August. Core inflation, which excludes energy and food, was slightly higher than expected at 3.6%. The Bank predicts inflation will rise to 2.5% by the end of the year.

Pound and Stock Market Reactions

The pound reached 1.33 against the US dollar, its highest level since early March 2022. This rise is due to the growing gap between interest rates in the UK and the US. Sterling also rose against the euro, hitting a two-year high. The FTSE 100 dipped slightly but stayed up by 0.7%. European stocks had a strong day, with the Euro Stoxx 50 gaining 1.8%. The best performers were companies like ASML, LVMH, and BMW, while Sweden’s OMX Stockholm 30 index saw the largest gains.