Sterling falls as Bank says open to more liquidity

By George Matlock

LONDON (Reuters) - Sterling fell sharply against the euro and the dollar on Wednesday after Governor Mervyn King said the Bank of England was open-minded about pumping more money into the economy and highlighted the benefits of a weak pound.

King spoke after the release of the bank's quarterly Inflation Report, which showed UK consumer prices will be below its 2 percent target in two years.

The central bank last week increased its quantitative easing (QE) programme, under which it buys assets to inject liquidity into the economy, by 25 billion pounds, in what many in the market said was likely to be a final top-up.

But King said policymakers had "a completely open mind" on whether to make further increases to the programme, which has a 200 billion pound target and has helped weaken sterling.

Comments by the Bank chief that a weaker sterling would help rebalance the economy away from exports and that UK growth was unlikely to return to pre-crisis levels for "a considerable period" also weighed on the pound.

"(Sterling's) fortunes were not helped by Governor King's observation that a weak pound would help in the process of rebalancing growth towards exports," said Daragh Maher, deputy head of global FX strategy at Calyon Credit Agricole CIB.

"Yet the currency reaction has to be balanced against a report which is somewhat more upbeat in terms of its activity projections, where the inflation shortfall is narrower than before, and where the risks are now balanced rather than to the downside. The detail is rather less sterling-negative than the initial headlines suggested," he added.

Rabobank strategist Jeremy Stretch said the market's interpretation was that the central bank was talking the pound down.