The fragile pound held its ground on foreign exchanges yesterday despite the Bank of England's drastic 1.5 percentage point cut in interest rates and its warning that the economy faced a “continued severe contraction in the near-term”.

Sterling confounded warnings before the Bank's decision that an aggressive cut in interest rates of a percentage point or more by the Monetary Policy Committee yesterday could trigger a disorderly collapse in the currency's value.

In the wake of the Bank's surprise move, the trade-weighted index of the pound's overall value ended yesterday little changed, at 86.0, although this remained at a 12-year low.

Against the dollar, sterling finished a dramatic day for the markets down 2.7 cents at $1.5892 compared with Wednesday's close at $1.6164. Against the euro it gained, with the single currency dropping by about a third of a penny to 80.44p a euro.

It remains to be seen whether sterling, which has recently been tumbling as currency markets deliver a vote of no confidence in Britain's economic prospects can continue to hold its ground in coming days with interest rates at a 54-year low of 3 per cent.

Generally, lower interest rates tend to weaken currencies, as returns on funds held in them are reduced. However, sterling benefited from investors' hopes that the Bank's bold interest rate move would improve the outlook for the UK's vulnerable economy.

In the City, currency traders and other dealers in the markets were badly wrong-footed by the Bank's decision after a majority of economists predicted only a half-point rate cut.

Market-watchers said it was likely that some currency speculators were left nursing losses after the Bank sprang its surprise, but that on the foreign exchanges these would have been limited by sterling's modest response.

Experts also said that speculative investors were likely to have been cautious before the Bank's verdict given the range of possible outcomes. However, market insiders said that many would have bet the wrong way, having used the interest rate futures market that seeks to forecast rate decisions.

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