Pound rally lifts sterling to a 10-year high as the Bank of England raises rates to 4%

The latest pound rally has carried sterling to a milestone not seen since the day Britain voted to leave the European Union. Bank of England data published on Thursday showed the currency reached its strongest level against a basket of 18 other currencies on Wednesday, the best reading since 23 June 2016.

What the numbers show

The figure comes from the Bank’s sterling effective exchange rate index, where 100 represents the pound’s value in January 2005. Reports put Wednesday’s reading at about 86.4, though the Guardian cited a more precise 86.5372. The pre-referendum benchmark also varies between outlets: the Press Association put it at 87.4, while the Guardian cited a different figure for referendum day. The BBC described the move as a joint highest level since the vote, so the pound has effectively recovered the ground it lost in that period.

The recovery follows a bruising decade. Sterling fell to a 31-year low against the dollar in the hours after the referendum, and it was later hit by the Covid pandemic, the 2022 mini-budget crisis and a string of elections. At the height of the pandemic in March 2020 the index sank to 73.1. On Thursday the pound was trading around $1.346 and close to €1.20, near an 18-month high against the euro.

Why the pound rally happened now

Analysts point to several overlapping causes. The most immediate was a weaker US dollar after Democratic gains in the midterm elections. Jim Reid of Deutsche Bank said investors were relieved the results were not disputed, and that a divided government made large tax cuts or spending packages harder to pass, which eased worries about US finances. Money flowed into other currencies in a broader “risk-on” rally.

The dollar is only part of the story. Sterling has also gained against the euro and the yen. The euro has been under pressure from concerns about France’s public finances, and Susannah Streeter of Wealth Club said political and economic difficulties there offered a “stark contrast” with the UK. She argued Britain’s “reputation for stability” was regaining some lustre, helped by efforts to rebuild ties with Brussels. The UK and EU are expected to announce new trade deals at a summit later this month.

Interest rates are the other driver. Markets had expected the Bank of England to lift its benchmark rate to 4%, its first increase in more than three years, and the move makes holding sterling more rewarding for investors. Sterling dipped about 0.1% against the dollar after the decision and was broadly flat against the euro, suggesting the hike was largely priced in. Governor Andrew Bailey, asked about closer EU ties, said he was “in favour of trade, trade and openness” as sources of growth.

What a stronger pound means for households

A firmer currency can help restrain inflation and stretches consumers’ money further on imported goods and foreign holidays. The BBC’s economics editor, Faisal Islam, noted that UK growth this year has beaten forecasts, though higher energy and fuel prices appear to be weighing on consumer confidence. Economist Jim O’Neill said people had underestimated the UK’s improving momentum.

There are reasons for caution. Part of the pound rally reflects weakness elsewhere rather than purely British strength, and a rebound in the dollar or a calmer picture in France could soften it. Streeter said better relations with Europe could boost growth further down the line, but only if they bring fewer trade frictions and closer economic cooperation. The coming EU deals and the Bank’s next moves will show whether sterling can hold its decade-high.

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