The pound plunged by more than 1.1% against the dollar after Bank of England policymakers cut interest rates to 4.5% in a stark warning about the state of the UK economy.
Despite dropping sharply after the noon announcement, the pound recovered to being 0.06% down, at $1.244, by close of trading today, when it was also 0.3% down against the euro, at €1.199.
Policymakers at the Bank of England voted 7-2 to slash the rate to its lowest level in over 18 months – with two members calling for an even more drastic reduction to 4.25%.
The Monetary Policy Committee (MPC) also halved its previous growth forecast for 2025 and predicted a surge in inflation – with new measures laid out in Rachel Reeves’ October Budget in the firing line.
The Bank warned that the UK economy is only set to grow 0.75% this year, down from an estimate of 1.5%, and suggested that inflation was expected to continue rising to hit a peak of 3.7% this summer before gradually falling again.
The rise in inflation, which is based on the rate of price rises across the economy, is thought to be linked to higher-than-expected energy prices and rising water bills and bus fares.
Despite the gloomy outlook, Bank of England Governor Andrew Bailey said the Bank was committed to cutting interest rates this year, boosting the FTSE 100 to a record high this afternoon.
However, economists have warned that the stock market index’s 1.2% rise by close of day on Thursday may “not [be] as impressive as it first looks”.
Joe Maher of Capital Economics told The Telegraph: “A weaker sterling exchange rate has flattened the FTSE’s performance in local-currency terms as a large share of firms in the index earn significant revenue overseas.
“A weaker pound pushes the value of overseas revenues higher in pound terms. Indices of shares of smaller UK companies, which typically earn less of their overall revenue overseas, have performed poorly over the past few months.”
Nonetheless, Danni Hewson, finance analyst at AJ Bell, said the Bank’s announcement had given the market a “shot of adrenaline”.
She said: “The latest interest rate cut might come with warnings about weak growth and the unpleasant return of higher prices, but today investors were happy to look past that and focus instead on the prospect of more cuts this year than had previously been priced in.”
Sir Keir Starmer also said the cut would give people “more money in their pockets” but the Bank warned that unemployment levels would also rise following tax and wage increases announced in the October Budget.
Against the backdrop of the £40 billion worth of tax rises unveiled by the Chancellor last year, policymakers raised their forecast for the number of people out of work in the UK to a peak of 4.75%.
Despite a slash to short-term forecasts, the UK economy was tipped to grow faster than expected in the longer term, with a growth rate of 1.5% in 2026 and 2027, both up 0.25% percentage points on previous estimates.
Mr Bailey said the Bank, which did not factor in potential US trade tariffs, would be “monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further”.