Sterling Surges as Bank of England Cuts Interest Rates Amid MPC Division

The British pound rose following a Bank of England interest rate cut, as the Monetary Policy Committee (MPC) remained divided. The MPC voted narrowly for the cut, indicating a gradual path ahead. BOE's rate strategy may lead to further rate expectations, influencing bond yields positively.

The Bank of England's Monetary Policy Committee voted to cut interest rates by a quarter-point to 3.75%, marking the fourth reduction this year. The decision, passed with a narrow 5-4 vote, reveals ongoing divisions within the committee. UK Governor Andrew Bailey, who voted for the cut this time, emphasized that interest rates are likely on a continual downward path but indicated that further decisions remain finely balanced.

Following the rate decision, the British pound made a surprising recovery against major currencies, reversing earlier losses. It gained 0.1% against the US dollar, reaching $1.3381, and rose 0.2% against the euro. Market participants speculate on the possibility of future rate cuts, although no new reductions are fully priced in until June 2026.

Reacting to the rate cut, UK government bond yields saw an uptick. The 10-year gilt yield climbed by 3.5 basis points to 4.517%, and the two-year yield, sensitive to policy changes, increased by 5 basis points to 3.768%. These movements followed softer-than-expected inflation figures for November, with consumer inflation dropping to its lowest since March at 3.2% versus a forecasted 3.5%.

(With inputs from agencies.)