Pound climbs to three-year high against dollar as red-hot inflation dampens hopes of further rate cuts

By HUGO DUNCAN

Updated: 22:00 BST, 21 May 2025

Sterling hit a three-year high against the US dollar after red-hot inflation dampened hopes of interest rate cuts in the UK.

In a report that raised questions over Chancellor Rachel Reeves’s handling of the economy, the Office for National Statistics said average prices rose 3.5 per cent in the year to April, up from 2.6 per cent in the year to March and the highest since January 2024.

The bleak figures saw investors trim their bets on future interest rate cuts, sending the pound and borrowing costs on the bond markets sharply higher.

Sterling pushed as high as $1.3468 against the dollar – the strongest level since February 2022. 

The yield on ten-year gilts – a key measure of borrowing costs in the UK – rose above 4.78 per cent, having been around 4.44 per cent at the end of last month.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘Sterling has risen amid expectations that the hotter inflation number will make policymakers more inclined to keep interest rates higher for longer.’

Pressure: Fears are mounting that Chancellor Rachel Reeves (pictured) will have to raise tax rises this autumn to make her Budget numbers add up

According to bets on financial markets, there is now just a one-in-ten chance of a Bank of England interest rate cut from 4.25 per cent next month with the next move not expected until the autumn. 

This week, the bank’s chief economist Huw Pill said he believed the pace of cuts was ‘too fast’ given the threat posed by inflation.

The prospect of lower rates tends to weaken a currency and push down yields on bond markets. 

The rise in pound and gilt yields is a signal investors think rates will not fall as far or as fast as previously thought. 

Monica George Michail, economist at the National Institute of Economic and Social Research, said: ‘We anticipate just one further interest rate cut this year.’

Rising borrowing costs make mortgages, corporate loans and national debt more expensive. Fears are mounting the Chancellor will have to raise taxes this autumn.

Bitcoin hits record high of $109,760 

Bitcoin hit a record high last night on hopes the US will agree to favourable regulation of cryptocurrencies.

The digital coin rose as high as $109,760 (£82,000) – eclipsing the previous peak set on January 20 when Donald Trump was sworn in as President.

Bitcoin fell as low as $76,000 (£57,000) in early April as optimism over Trump’s return to the White House evaporated.

But it has since recovered thanks to signs that crypto-friendly legislation will successfully pass through Congress.

‘That freed up the animal spirits both here and abroad,’ Michael Novogratz, of Galaxy Digital, told Bloomberg TV.

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Pound climbs to three-year high against dollar as red-hot inflation dampens hopes of further rate cuts

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