Bank of England raises rates to 4% – what does this mean for the pound?

Higher interest rates should, in theory, support sterling by making UK assets more attractive to overseas investors. However, today's increase was widely anticipated, so much of the benefit will already be reflected in the exchange rate.

The more important question is what happens next. The Bank's 8-1 vote signals a determination to tackle inflation, but higher borrowing costs also risk weakening growth. Sterling's direction will depend as much on the outlook for UK rates relative to those in the US and Europe as on today's decision.

For anyone exchanging currencies, trying to time the market is rarely a winning strategy. If you need foreign currency soon, consider exchanging in stages rather than betting everything on one rate. A forward contract can also provide certainty for larger future payments.

This is another kick in the teeth for hardworking families. The pound might get a boost, but mortgage holders are getting another bloody nose! Higher interest rates mean higher payments for tracker borrowers and potentially more expensive mortgage deals for others. I understand the Bank of England is trying to control inflation, but much of today’s pressure comes from energy, fuel and global instability. Increasing mortgage costs won’t magically make oil cheaper! In my opinion, the Bank is being forced to make difficult decisions while the Government’s vanilla-white Budget has done precious little to restore economic confidence. The Bank of England is trying to put out an inflation fire while working families are being handed the water bill! A stronger pound might buy you a few more euros on holiday, but that’s cold comfort when your mortgage payments are eating into your wages.

A higher base rate can lend sterling some support, because people who hold pounds can earn more interest on them, but currencies move on the gap between UK rates and everyone else's and on what markets already expected, so a rise that was largely priced in often does less than people assume. We don't forecast the direction of the pound, and this decision doesn't change that, as a rise can support sterling while also reflecting inflation worries, and the one vote for a bigger increase shows the MPC isn't settled on how far to go. The pound's reaction depends more on the path the Bank sets out next than on the decision itself. For anyone exchanging money now or soon, rates can move sharply around announcements, so we'd avoid exchanging in the minutes after main events, or if a payment is due, we'd set a rate we can live with and plan around that rather than waiting for another headline.

The Bank of England’s decision to raise the base rate to 4% was fully priced in. What will strengthen the Pound further is the aggressive 8–1 MPC vote for the 0.25% rise. It signals to the markets that this may not be a “one-and-done” increase, and that interest rates will stay higher for longer, well into 2027. Higher rates mean better returns on UK deposits and debt, so foreign investors pile in. The 8–1 vote shows a committee serious about beating inflation, and markets like that. For anyone exchanging currency, a stronger Pound means Sterling buys more abroad, good news for holidaymakers and international buyers. Going the other way, overseas money buys fewer Pounds, so converting into Sterling gets less attractive. The catch? Higher borrowing costs can choke domestic growth further in an economy already suffering from anaemic growth. And if rates tip us into a prolonged recession, sentiment can turn, putting downward pressure on Sterling over the longer term.