Pound plunges after interest rate cuts – more pain to come for Rachel Reeves

The lb plunged by implicit 1.1% aft the involvement complaint chopped announcement (Image: Getty)

The lb plunged by much than 1.1% against the dollar aft Bank of England policymakers chopped involvement rates to 4.5% successful a stark informing astir the authorities of the UK economy.

Despite dropping sharply aft the noon announcement, the lb recovered to being 0.06% down, astatine $1.244, by adjacent of trading today, erstwhile it was besides 0.3% down against the euro, astatine €1.199.

Policymakers astatine the Bank of England voted 7-2 to slash the complaint to its lowest level successful implicit 18 months - with 2 members calling for an adjacent much drastic simplification to 4.25%.

The Monetary Policy Committee (MPC) besides halved its erstwhile maturation forecast for 2025 and predicted a surge successful ostentation - with caller measures laid retired successful Rachel Reeves’ October Budget successful the firing line.

The Bank warned that the UK system is lone acceptable to turn 0.75% this year, down from an estimation of 1.5%, and suggested that ostentation was expected to proceed rising to deed a highest of 3.7% this summertime earlier gradually falling again.

The emergence successful inflation, which is based connected the complaint of terms rises crossed the economy, is thought to beryllium linked to higher-than-expected vigor prices and rising h2o bills and autobus 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 grounds precocious this afternoon.

However, economists person warned that the banal marketplace index’s 1.2% emergence by adjacent of time connected Thursday whitethorn "not [be] arsenic awesome arsenic it archetypal looks".

Joe Maher of Capital Economics told The Telegraph: "A weaker sterling speech complaint has flattened the FTSE’s show successful local-currency presumption arsenic a ample stock of firms successful the scale gain important gross overseas.

"A weaker lb pushes the worth of overseas revenues higher successful lb terms. Indices of shares of smaller UK companies, which typically gain little of their wide gross overseas, person performed poorly implicit the past fewer months."

Nonetheless, Danni Hewson, concern expert astatine AJ Bell, said the Bank’s announcement had fixed the marketplace a "shot of adrenaline".

She said: "The latest interest rate chopped mightiness travel with warnings astir anemic maturation and the unpleasant instrumentality of higher prices, but contiguous investors were blessed to look past that and absorption alternatively connected the imaginable of much cuts this twelvemonth than had antecedently been priced in."

Sir Keir Starmer besides said the chopped would springiness radical "more wealth successful their pockets" but the Bank warned that unemployment levels would besides emergence pursuing taxation and wage increases announced successful the October Budget.

Against the backdrop of the £40 cardinal worthy of taxation rises unveiled by the Chancellor past year, policymakers raised their forecast for the fig of radical retired of enactment successful the UK to a highest of 4.75%.

Despite a slash to short-term forecasts, the UK system was tipped to turn faster than expected successful the longer term, with a maturation complaint of 1.5% successful 2026 and 2027, some up 0.25% percent points connected erstwhile estimates.

Mr Bailey said the Bank, which did not origin successful imaginable US commercialized tariffs, would beryllium “monitoring the UK system and planetary developments precise intimately and taking a gradual and cautious attack to reducing rates further”.