Sterling tumbles as likelihood of increased interest rates recedes

Sterling tumbled yesterday as the Bank of England (BoE) cut its growth forecasts for the UK economy and predicted that UK inflation would drop below 1% within 6 months. Sterling lost over a cent against both the euro and US dollar as investors adjusted their “bets” on when the BoE are likely to raise interest rates.

A positive start to the day had initially seen sterling gain ground as average earnings beat expectations to post an increase of 1% compared to the previous year. Despite this positive data, sterling fell away following the BoE inflation report and the accompanying press conference. In this, the BoE revealed that they expected inflation to continue to drop in the short term, and could take up to three years to reach their 2% target. Additionally, BoE Governor Carney warned that a pick-up in wage growth would act as a threshold for an interest rate hike, but not necessarily as a trigger. Due largely to recent troubles within the Eurozone, the BoE also cut their economic growth outlook, citing a reduction in overseas growth.

A quieter day lies ahead for sterling, with no further significant news expected out of the UK. Instead, attention will be focused on the US where weekly unemployment claims are likely to be the headline figure of the day.