LONDON, Jan 30 — Sterling headed back towards US$1.31 (RM5.36) today after the Bank of England kept interest rates at 0.75 per cent, defying money markets that had seen a 50 per cent probability of a cut.

Following the move, interest rate futures moved to almost price out a rate cut at the March meeting as well, reinforcing the pound’s gains.

"Both the hold and the vote will add upside pressure for the pound,” Neil Jones, head of FX hedge fund sales at Mizuho said.

Sterling rose to a high of US$1.3095, up 0.6 per cent on the day. Against the euro, the currency gained 0.5 per cent to 84.16 pence.

The meeting, the last under Governor Mark Carney, was one of the least predictable for years. Money markets had factored in a 50 per cent probability of a 25-basis-point rate cut.

Britain’s economy struggled at the end of 2019, prompting several policymakers to say this month they would vote for a rate cut unless data improved. Carney said earlier this month a case could be made for a precautionary cut.

But economic momentum has shown signs of picking up since December’s general election, the BOE said, adding that signs of global stabilisation also meant stimulus was not needed yet.

The Monetary Policy Committee remained split along the 7-2 lines as before, with external members Michael Saunders and Jonathan Haskel again voting to lower rates.

The benchmark FTSE 100 equity index fell 1.1 per cent to session lows as the pound rose. The mid-caps FTSE 250 benchmark rose, then headed towards its lows for the day, losing 0.5 per cent

Ten-year British government bond yields, which had dropped to three-and-a-half-month lows of 0.484 per cent earlier, rose after the meeting to 0.53 per cent.

Analysts expect sterling strength to be limited. Britain officially leaves the European Union on Friday, setting the clock ticking on an 11-month deadline to reach a trade agreement with the EU.

The BoE decision also prompted money markets to slash their expectations for a rate cut in March, the month its new governor, Andrew Bailey, takes over. They now see just a 16 per cent probability of a 25 bps cut, versus 80 per cent before the announcement.

Dean Turner, UK economist at UBS Wealth Management, said recent flash PMIs signalled a post-election economic recovery but added that the economy was likely to hit more obstacles.

"Therefore, we still expect the BoE to cut rates at some point in the next six months to give the economy additional support,” Turner said. — Reuters