Sterling jumped 1.5 per cent 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 Bank of England’s inflation report, its strongest since October 7th, the day a “flash crash” briefly sent sterling plunging 10 per cent in a matter of minutes. That left it almost 2 cents higher than where it started the day’s trading.

“While the committee now expects stronger growth through the balance of this year, it is the fall in sterling that will have the more significant implications for the path for inflation at the monetary policy horizon,” Bank of England governor Mark Carney said following the announcement.

“The reason the exchange rate has moved, the predominant reason why the exchange rate has moved, in our judgment, is judgments that are being made in financial markets about the future of the real economy.”

Parliamentary approval

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 per cent 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 per cent. It last stood at 1.23 per cent, up 6 basis points on the day.

Britain’s blue-chip FTSE 100 extended losses as sterling rose, and was last down 0.5 per cent.

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. – Reuters