Sterling rises and rate futures slip as Bank holds rates

LONDON (Reuters) - Sterling rose versus the dollar and euro on Thursday, while UK interest rate futures slipped and stock markets pared gains after the Bank of England kept interest rates on hold at 5 percent, as expected.

The pound had started slipping just prior to the decision as markets had priced in a 25 percent chance of a surprise interest rate cut.

By 12:05 p.m., sterling was up 0.4 percent on the day at $1.7816 GBP=, having fallen to $1.7768 just before the verdict. The euro hit session lows of 81.25 pence EURGBP=. It earlier moved to record highs at 81.86 pence.

Short sterling interest rate futures slipped a tick or two on the decision, to stand between one and 2.5 ticks lower on the day.

The December gilt future FLGZ8 pared gains to stand 4 ticks higher on the day having been 9 ticks higher beforehand.

The FTSE 100 .FTSE pared gains after the decision, up 0.55 percent.

Analysts said the overall UK economic outlook remained dire, with rate cuts still on the cards before the end of this year.

"The decision for the Bank to sit on its hands once more was no surprise, however evidence is rapidly mounting that the UK is edging ever closer to recession. Everywhere you look the economic reality is becoming more and more grim," Martin Slaney, head of derivatives at GFT.

(Reporting by London Markets Team)