How did the BoE's decision to freeze interest rates impact on the pound?

In some respects, the Bank of England (BoE) have capped the base interest for so long that the level of speculation surrounding last weeks' so-called 'Super Thursday' suddenly seems unwarranted in retrospect.

After all, most of the nation's leading economists predicted that the BoE would maintain the existing rate of 0.25%, particularly given the absence of the hawkish former policymaker Kristin Forbes from Thursday's discussions. The subsequent 6-2 vote in favour of retaining the existing rate hardly came as a surprise, while its predictable nature turned Super Thursday into a damp squib.

But how did the announcement impact on the markets and the British pound (GBP)? Let's take a look:

The Pound Dives, but the Stock Market Stays Strong

Normally, the decision to maintain the existing base interest rate would have minimal impact on the economy, particularly in instances when the decision was expected. On this occasion, however, the reaction of the markets and the GBP was exacerbated by the BoE's announcement that it had downgraded its 2017 growth forecast for the UK, which declined by two percentage points to 1.7%.

The combination of declining growth and a stagnant base rate had a devastating impact on the GBP, which dived by 0.8% against the U.S. Dollar (USD). This undid months of incremental gains for the GBP, which hit an eight-month high against the USD in May and gained eight percentage points during the last three months alone. A disproportionately high inflation rate of 2.6% has also continued to undermine the pound, as while the worst of this may be coming to an end it continues to ensure that the GBP trades in increasingly narrow ranges. 

If the decline of the pound was to be expected, so too was buoyant performance of the FTSE 100 and its smaller cousin the FTSE 200. Both indices tend to be bolstered by the devaluation and subsequent sell-off of the GBP, as this boosts the earnings of London-listed ventures that operate largely across international markets. As the pound depreciates against other major currencies, so too their balance books increase accordingly, so it was no surprise to see the stock market respond well to the BoE's announcement.

In specific terms, the internationally-focused FTSE 100 closed an impressive 63.34 points higher immediately after the announcement, with retailer Next enjoyed an increase of 9.7%. The FTSE 2050 saw brands such as Cobham also rally, recording growth of 8.4% and sentiment improved. While brands with a more national focus may have lost out, there is no doubt that stocks provided a ray of hope for investors who sought solace in a volatile marketplace.

The Last Word: Where Next for the Pound?

This is a trend that we are likely to see sustained over the coming weeks, with the GBP primed for another period of depreciation against the USD (and to a lesser extent the Euro). In truth, the pound will probably continue to trade in a narrow range indefinitely, particularly as Brexit negotiations continue and the BoE maintain a conservative approach to managing the base interest rate in the UK.

Not only with this have a direct impact on the stock market and forex trading, as currency investors with a minimal appetite for risk are likely to either switch their attention to shares or simply hedge against the pound in the weeks ahead.