The pound climbed to a three-week high against both the dollar and euro today despite the Bank of England cutting rates to an historic low.

The 50-point cut took the base rate to 1.5 per cent, the lowest in the Bank's 314-year history. After market talk of an even greater cut, however, traders took that as a sign of caution from the policymakers of Threadneedle Street and bid sterling up.

The pound rose to as high as $1.5337 against the dollar, up from $1.5042 before the rate cut was announced at noon. The euro was down 1 per cent, hitting 88.94 pence - its lowest level since mid-December – before recovering to trade at around 89.40.

Between Christmas and the New Year, the euro reached virtual parity with the pound. It reached a high of 97.85, climbing from around 78 pence in October as the weakness of the UK's public finances became apparent. Meanwhile sterling's weakness against the dollar made Christmas shopping trips to New York a distant memory.

But fears over the strength of the US and European economies, and the possibility of a further rate cut from the European Central Bank, have put the pound on a much firmer footing. It has recovered around 10 per cent of its value so far this year, good news not just for holidaymakers with a ski package booked but for High Street consumers too.

Mark O’Sullivan, director of dealings at Currencies Direct, warned that the recent rise may be a relief rally. “I do expect the pound to move higher this year, but the recent rally could be a false dawn,” he said. “There’s some relief that the Bank of England didn’t cut rates by as much as 1 per cent, but the view is that rates will come down again and may even go close to zero."

In its statement, the BoE cited a “substantial” decline in the pound as helping to offset the impact of a slower global economy and would act as a stimulus going forward. On the other hand, it admitted, a weaker pound would raise the cost of imports, although inflation overall is expected to fall further.

One reason for sterling's resilience despite today's rate cut was a feeling that the Treasury was holding off on a policy of "quantitative easing" – boosting money supply as rates hit rock-bottom to increase liquidity during the credit crunch.

“Nobody is talking about printing money,” Alistair Darling, the Chancellor, told reporters during a visit to Liverpool. “There’s a debate to be had about what you do to support the economy as interest rates approach zero as they are in the United States. But for us that is an entirely hypothetical debate.”

Brian Hilliard, economist at Societe Generale, said the Bank had probably reined in its cuts because of the weakness of sterling. "Notable by its absence was any comment on quantitative easing," he added. "I don’t think it’s actually on the agenda until they get rates down to close to zero.”

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