The pound fell to its lowest since March and British stocks outperformed the wider market after the Bank of England held interest rates steady on Thursday, following a cooler-than-expected inflation print the previous day.

Sterling was last down 0.53% at $1.2278 at 1345 GMT, after touching its lowest since late March at $1.2231 following the decision. It traded around 0.4% lower at $1.23 before the outcome of the BoE’s policy meeting.
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Britain’s FTSE 100 (.FTSE) stock index pared its earlier losses and was last down 0.19%, having briefly moved into the green, boosted by rate-sensitive real estate and homebuilder stocks. The index traded 0.7% lower before the decision.

The mid-cap FTSE 250 index (.FTMC) also pared losses and was last 0.2% lower. Both gauges outperformed the pan-European STOXX 600 (.STOXX), which was down around 1.1%.

The BoE’s Monetary Policy Committee voted by a narrow margin of 5-4 to keep its benchmark rate at 5.25%.

The decision came a day after data showed British inflation slowed more than expected in August, coming in at 6.7% year-on-year, down from 6.8% in July. Economists had expected a rise to 7%.

“There are increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally,” the MPC said in a statement.

Nick Rees, FX market analyst at Monex Europe, said the pound was under pressure after the U.S. Federal Reserve held interest rates on Wednesday but signalled that it was likely to leave them on hold for longer than markets expected.

“The pound has continued to slump again today as markets react to the BoE’s decision to hold in an environment where the Fed has signalled a much-higher-for-far-longer path,” he said.

The euro was last 0.52% higher against the pound at 86.8 pence. It traded around 86.65 pence before the BoE’s decision, up roughly 0.3%.

Pricing in derivatives markets showed traders’ average bet was that BoE rates would rise to 5.37% by early 2024, down from around 5.42% before the decision.

“The question now is firmly centred on whether this pause will remain or if another rate rise will be needed in November, only time and further economic data will tell,” Frances Haque, UK chief economist at Santander, said.

The yield on Britain’s benchmark 10-year bond wavered after the decision and was last roughly where it was before the BoE’s statement, up 9 bps at 4.302%.

The pound sterling hit a 12-week low against the US dollar on Tuesday on the back of disappointing UK economic data.

At the time of writing, the pound to dollar exchange rate (GBPUSD=X) was trading close to levels not seen since 13 June at 1.25, meaning £1 will get you $1.25. On 14 July, the rate was at 1.31.

It comes after the UK S&P Global/CIPS composite Purchasing Managers’ Index (PMI) dropped to 48.6 in August from 50.8 in July, the lowest since January.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said to Yahoo Finance UK: “The ratcheting up in interest rates is now making its mark on the services sector which until now has been more resilient to the attempts to squeeze down on demand to drive down prices.

“The closely watched S&P Global/CIPS UK Services PMI showed a contraction in August, indicating confidence is evaporating among companies and consumers. Data out today from Barclaycard also indicated that spending during the month dropped markedly compared to July, particularly across the hospitality sector as people turned more cautious.”

As a result, she said, the data builds on the picture of a slowing economy and is helping to reinforce bets that interest rates won’t go as high as the market had been predicting just weeks ago which is why sterling has dropped sharply against the dollar today to levels not seen since early June.

The data followed an update on UK retail prices this morning from the British Retail Consortium (BRC) with the sector witnessing a 4.1% increase in August, compared with a growth of 1.0% in August 2022, suggesting inflation is easing.

The Bank of England (BoE), which has raised its key interest rate 14 consecutive times to 5.25%, was expected to go ahead with a 25 basis point rate hike this month.

One of the bank’s chief economists reiterated this expectation last week when he acknowledged persistently high inflation and vowed the bank will bring inflation down.

The BoE will be meeting the same week as the US Federal Reserve, which investors will be keeping across to see how the GBP/USD develops.

The dollar index, meanwhile, which measures the US currency against six peers including the pound and euro, was up 0.4% at 104.61. It got a boost following weak activity data from China and Europe.