* UK Q4 GDP suffers shock contraction, pound slides
* Sterling falls over a cent vs dollar, down 1 pct on day
* MPC Governor King speech at 1900 GMT closely watched
(Recasts, adds quotes, detail)
By Neal Armstrong
LONDON, Jan 25 Sterling plunged on Tuesday after
a shock contraction in fourth quarter UK GDP data, pushing back
the chances of monetary tightening by the Bank of England in the
Britain's economy shrank 0.5 percent in the last three
months of 2010, bucking forecasts for a 0.5 percent expansion,
with December's heavy snow accounting for only part of the first
contraction in five quarters, official data showed on Tuesday.
The figures will be bad news for the government which is due
to start cutting public spending in earnest early in 2011, and
will cast doubt on market expectations that the Bank of England
will raise interest rates in the first half of the year.
"Sterling has been clobbered on the data which was very much
weather-distorted, but even if you take that into account it's
disappointing. This supports the thinking by the BoE's Adam
Posen that all is not well in the UK economy," said Paul Mackel,
Director of Currency Strategy at HSBC.
Sterling fell by more than a cent versus the dollar GBP=D4
to a session low of $1.5770, down around 1.4 percent on the day.
Traders said an Asian sovereign account was looking to buy the
pound around its lows.
The euro EURGBP=D4 rose around 50 pips to trade above 86
pence for the first time in three weeks, hitting a session high
of 86.16. A UK clearer had been reported as the main euro buyer
in early trade.
Short sterling interest rate futures from June 2011 out
were as much as 20 ticks up on the day. <0#FSS:>
"While today's GDP figures are backward-looking, they are
nevertheless crucial to understanding the resilience of the
economy to shocks. It seems that the economy is incredibly
vulnerable. And with the fiscal tightening yet to fully bite, we
will have to brace ourselves for a bumpy ride," said Hetal
Mehta, economist at Daiwa Capital Markets Europe.
Separate ONS figures showed that Britain's public sector net
borrowing rose from a year ago to its highest December reading
on record, though it fell from the all-time record reached in
Sterling had been supported through most of January as
market expectations of higher UK interest rates grew.
Surprisingly high UK CPI data for December released last week
had illustrated persistent inflationary pressures in the
This presents a dilemma for the Bank of England, which now
has to juggle a worrying outlook for growth combined with
elevated price pressures.
BOE KING SPEAKS
BoE policy hawk Andrew Sentance pointed firmly to one side
of the Bank's dilemma on Monday evening, saying that the factors
pushing up British inflation cannot simply be dismissed as
"one-off" influences and that the bank risks losing credibility
if it fails to respond.
In comments which highlight his disagreement with BoE
Governor Mervyn King -- who is likely to use a speech on Tuesday
evening to argue price rises are under control -- Sentance said
inflation risked becoming entrenched and a gradual tightening of
policy now could prevent a more aggressive move later on.
Posen, the most dovish member of the bank's Monetary Policy
Committee, has argued that spare capacity in the economy would
keep a lid on inflation. In October he called for more stimulus
to ward off the threat of a prolonged period of economic
(Editing by Susan Fenton)