Sterling hits 1-month low, bond yields fall after BoE cuts rates

By Harry Robertson and Sruthi Shankar

LONDON (Reuters) - The pound fell to a one-month low on Thursday after the Bank of England cut interest rates for the first time since 2020 in a 5-4 vote that took borrowing costs down to 5%, while bond yields hit their lowest since March.

However, the moves later moderated as investors focused on the narrow nature of the decision and the BoE's messaging that it would move "carefully" when thinking about future moves.

Sterling hit its lowest since early July immediately after the decision, at $1.2752, having traded around 0.65% lower just before the meeting as markets anticipated a cut.

The pound then rebounded somewhat, helped upwards by a fall in the dollar after some weaker-than-expected U.S. jobs data, and was last down 0.33% at $1.2814.

Many analysts said the BoE's Monetary Policy Committee sounded relatively "hawkish" - that is, less inclined to keep lowering interest rates quickly.

"It appears that both street analysts and the MPC were conflicted about the need for a rate cut today," said Seema Shah, chief global strategist at Principal Asset Management.

"The Bank has delivered a hawkish cut, giving little signal of back-to-back rate reductions."

British bond yields fell after the decision, with the 10-year yield sliding to 3.912%, the lowest since mid-March.

The weekly U.S. jobs data helped pull yields down globally, as investors increased their bets on Federal Reserve rate cuts this year.

British stocks initially rose before slipping back. Britain's FTSE 250 index of mid-sized companies climbed more than 0.6% to its highest level in two years, and was last up 0.29%. The FTSE 100 stock index was flat, little changed from before the decision.

British inflation has fallen back to the BoE's 2% target from a 41-year high of 11.1% in 2022. Although inflation in wages and in the services sector has remained elevated, BoE policymakers narrowly decided those pressures were benign enough to lower interest rates after holding them since August 2023.

"We need to make sure make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much," BoE Governor Andrew Bailey said in a statement alongside the decision.

The pound has been the best performing of the world’s 10 most traded currencies so far this year, as British growth has beaten expectations, while underlying inflationary pressures have stayed strong.

But expectations that the BoE would lower interest rates at the August meeting have caused sterling to fall around 2% from a one-year high of $1.3044 touched in mid-July.

British bond yields have also fallen, helped on by a global fixed income rally driven by optimism that the Federal Reserve will soon be lowering rates as U.S. inflation cools.

(This story has been refiled to fix the word analysts in paragraph 5)

(Reporting by Harry Robertson in London and Sruthi Shankar in Bengaluru; Editing by Amanda Cooper, Ros Russell, Alun John and Frances Kerry)