Pound falls and gilt yields see-saw on rate of interest reduce hints and the turmoil in No.10

The pound fell sharply and gilt yields see-sawed wildly yesterday as interest rate expectations and political turmoil gripped the City.

Currency traders sold off sterling as the Bank of England – led by Governor Andrew Bailey – left interest rates on hold but opened the door to a cut within weeks.

And fears that Prime Minister Keir Starmer could be kicked out to be replaced by a Labour Left-winger – as the fallout from the Jeffrey Epstein scandal threatens to overwhelm Downing Street – also took their toll.

The pound slumped by a cent against the US dollar to close to $1.35 and dropped by a cent versus the euro to less than €1.15.

UK bonds – known as gilts – suffered a volatile session as events in Westminster and Threadneedle Street pulled them in different directions.

Gilts are small parcels of UK debt. When their prices fall, the yields they pay to investors rise, effectively pushing up the cost of government borrowing. 

Cautious: Currency traders sold off sterling as the Bank of England – led by Governor Andrew Bailey (pictured) – left interest rates on hold but opened the door to a cut within weeks

Yields rose sharply early yesterday to more than 4.6 per cent – a four-month high – as investors fretted over Starmer’s future.

They then reversed course after the Bank of England’s Monetary Policy Committee voted by a narrow 5-4 majority to leave interest rates on hold at 3.75 per cent.

The vote was narrower than markets had expected and, together with new Bank forecasts of sluggish economic growth and rising unemployment, prompted traders to bet that a cut to 3.5 per cent could come in March or April.

That sent yields tumbling down to 4.5 per cent before bouncing again to 4.56 per cent later in the session.

Matt Swannell, an adviser at the economic forecasting group EY ITEM Club, said: ‘While the decision to keep Bank rate unchanged was as expected, the extent of the support amongst the Monetary Policy Committee for an immediate rate cut came as a surprise.

‘It appears that most members are slightly less worried about sticky pay and inflation, and more concerned about the subdued growth outlook.

‘There were no promises made on when the next rate cut will come – but today’s 5-4 vote clearly puts a March cut on the table.’