LONDON: Sterling jumped 1.5 percent to a four-week high on Thursday as UK government bond yields shot up, after the Bank of England scrapped plans to cut interest rates and said the chances of a rate hike had risen.
The pound reached $1.2488 after the BoE's inflation report, its strongest since Oct. 7 - the day a "flash crash" briefly sent sterling plunging 10 percent in a matter of minutes. That left it almost 2 cents higher than where it started the day's trading.
"It certainly looks like they (BoE policymakers) are becoming more concerned about the impact of sterling's weakness on the outlook for inflation," said Lee Hardman, an analyst with Bank of Tokyo-Mitsubishi in London.
"They have even signalled that they could raise rates even if that is not the core scenario. Relative to the previous meetings, the change is really noticeable. I was expecting them to place more emphasis on the weaker medium term outlook."
The currency had already been driven sharply higher by a ruling from England's High Court that government would need parliamentary approval before triggering the formal process that will take Britain out of the EU.
Against the euro, sterling jumped 1.9 percent to a four-week peak of 88.595 pence.
The 10-year government bond yield shot higher after the decision to peak at 1.258 percent. It last stood at 1.23 percent, up 6 basis points on the day.
Britain's blue-chip FTSE 100 extended losses as sterling rose, and was last down 0.5 percent.
Euro zone government bond yields tracked gilt yields higher, with Germany's benchmark 10-year Bund yield rising 4 basis points to a session high of 0.174 percent.
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