Finance
Pound, UK borrowing costs drop as investors up bets on rate cuts after dovish BoE
Published by Global Banking & Finance Review®
Posted on February 5, 2026
3 min readLast updated: February 5, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on February 5, 2026
3 min readLast updated: February 5, 2026
Sterling and short-term gilt yields fell after the BoE's dovish vote. The pound hit a two-week low against the dollar, and future rate cuts are possible if inflation slows.
By Lucy Raitano
LONDON, Feb 5 (Reuters) - Sterling and UK government borrowing costs fell on Thursday, as investors quickly priced in a much higher chance of a near-term rate cut, after the Bank of England said it expected a future cut if inflation continued to slow.
The decision to keep the bank rate at 3.75% was in line with expectations but the 5-4 vote split was a closer call, with an earlier Reuters poll having pointed to 7-2 vote split.
"The vote split is a lot more dovish than expected. It's what markets are reacting to," said Kirstine Kundby-Nielsen, analyst at Danske Bank.
The pound extended losses and hit a near two-week low against the dollar after the decision, and was last down 0.6% at $1.358..
"A low inflation forecast has contributed towards easing some members’ concerns about inflation persistence," said Philip Shaw, chief economist at Investec.
"Our forecast has been that the MPC would keep rates on hold until the end of April, but we wouldn’t be surprised if that cut is brought forward," he said.
UK short-dated two-year gilt yields - which reflect short-term interest rate expectations - headed for their biggest one-day drop since last April, as bond prices rallied, dropping 9 basis points on the day to a three-week low of 3.63%.
After the BoE decision traders were pricing in nearly 50 bps of rate cuts by year-end, implying two more quarter-point reductions. This is up from 35 bps by year-end just before the BoE decision.
"They have tweaked the cautious easing guidance by scrapping reference to a gradual downward path of the bank rate," said Elias Haddad, senior markets strategist at Brown Brothers Harriman.
The BoE has also slashed its inflation forecast to 1.7% - below its 2% target - and said it expects inflation to slide to reach that target in April, much sooner than in its early November forecast.
UK 10-year gilt yields dipped 2 bps to 4.53%.
The blue-chip UK FTSE 100 initially pared some earlier losses after the decision, but was last down 0.4%
Sterling was weak during morning trading amid growing pressure on UK Prime Minister Keir Starmer over former U.S. ambassador Peter Mandelson's ties to the late U.S. sex offender Jeffrey Epstein.
"We've got twin problems for sterling today, obviously, with more rate cuts being priced and all the political risks," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.
(Reporting by Lucy Raitano and London markets team; Editing by Amanda Cooper)
The Bank of England is the central bank of the United Kingdom, responsible for issuing currency, managing monetary policy, and ensuring financial stability.
Monetary policy is the process by which a central bank manages the supply of money and interest rates to achieve specific economic objectives.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.
Sterling refers to the British pound, the official currency of the United Kingdom, often denoted by the symbol £.
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