The pound (GBPUSD=X) jumped to its highest level against the US dollar in two and a half years after the Bank of England (BoE) left interest rates unchanged on Thursday.

Sterling rose by almost a cent to $1.331 on the back of the news, its highest level since March 2022, before retreating slightly.

The Monetary Policy Committee (MPC) held interest rates steady at 5% but were split on the decision, voting 8–1 to maintain Bank Rate.

Swati Dhingra, the most dovish member of the committee, voted against the move and wanted to cut rates to 4.75%. The other eight members — Andrew Bailey, Sarah Breeden, Megan Greene, Clare Lombardelli, Catherine L Mann, Huw Pill, Dave Ramsden and Alan Taylor — all voted to keep rates steady.

BoE governor Bailey said: “Inflationary pressures have continued to ease since we cut interest rates in August. The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time.”

“But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”

UK inflation held steady at 2.2% in August.

Investors predict two cuts will happen before the end of the year, with the first expected to take place in November.

Read more: What the Bank of England’s interest rate decision means for your mortgage

Luke Bartholomew, deputy chief economist at Abrdn, said: “Clearly, the Bank’s relative caution stands in some contrast to the Fed’s strong start to its easing cycle, with a 50bps cut yesterday. This difference in policy partly reflects different mandates of the two central banks, but also the different growth and inflation outlook.

“Underlying inflation pressures in the UK remains elevated, while the labour market is sending quite mixed messages about the health of the economy. This divergence should help support the pound for now.

“But attention in UK markets may increasingly shift away from monetary policy and towards fiscal policy as we approach the budget at the end of October. Certainly, the Bank will need to incorporate any fiscal changes in its next forecasts, which could provide the foundation for more rapid cuts in due course.”

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