Sterling strengthens after BoE says rates to stay high, gilts pare gains

Sterling strengthened against the dollar and euro on Thursday after the Bank of England (BoE) kept rates on hold as forecast and pushed back against expectations of interest rate cuts, a different stance from the Federal Reserve a day earlier.

The pound rose by as much as 0.74 per cent to $1.2711, a 10-day high. It also firmed versus the euro, which was down 0.17 per cent at 86.04 per cent.

The BoE said British interest rates needed to stay high for 'an extended period'.

Traders meanwhile trimmed their bets on the extent of rate cuts in 2024 from the BOE, with the first fully priced in for June as opposed to May before the decision.

The BoE's Monetary Policy Committee voted 6-3 to keep rates at a 15-year high of 5.25 per cent, in line with economists' expectations in a Reuters poll last week. The three policymakers who dissented wanted a further hike to 5.5 per cent.

There was no discussion of cutting interest rates, and the BoE remains concerned that inflation in Britain will continue to be stickier than in the US and the euro zone.

Fed chair Jerome Powell on Wednesday did little to challenge expectations of US rate cuts for 2024 saying the Fed's tightening of monetary policy is likely over and a discussion of cuts in borrowing costs is coming "into view."

That caused traders to increase bets on US rate cuts and markets are now pricing around 150 basis points of easing from the Fed in 2024, a major increase from before the decision.

Prices of British government bonds, or gilts, pared their gains having earlier joined in the global bond rally on the back of rate-cut expectations.

The rate-sensitive two-year yield was last down 4 bps at 4.32 per cent having earlier dropped to as little as 4.17 per cent, its lowest since May, in sympathy with the decline across global bond yields.

(With Reuters Inputs)