May 10, 2018 / 11:31 AM / a year ago

Sterling down, bonds rise as Bank of England cuts inflation, growth forecast

FILE PHOTO: UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture, October 26, 2017. Picture taken October 26, 2017. REUTERS/Dado Ruvic

LONDON (Reuters) - Sterling reversed earlier gains and fell to the day’s lows on Thursday after the Bank of England kept interest rates on hold as widely expected, but cut inflation and growth projections for this year and the next.

Before the decision, sterling was up as much as 0.4 percent at $1.3618 but fell to trade 0.2 percent lower on the day at $1.3521, not far away from a four-month low of $1.3485 hit on Tuesday.

While expectations of a rate hike have fallen rapidly in recent days after a run of weak data and cautious comments from policymakers, the cut in inflation and growth forecasts weighed on currency markets.

The 2-year gilt yield fell around 2 basis points after the decision to 0.81 percent.

Short sterling interest rate futures <0#FSS:> rose 3 to 4 ticks across 2018 and 2019 contracts, indicating a shallower path for future BoE interest rate rises.

“I think the fact you have as expected downgrades to growth forecasts and more importantly perhaps, downgrades to the inflation story for 2019 and 2020 period, has probably been a influence on sterling,” said Sarah Hewin, chief economist for Europe at Standard Chartered in London.

Britain’s blue chip FTSE 100 index cut losses to trade flat in percentage terms after the BOE kept rates on hold.

Reporting by Tom Finn, Andy Bruce and Kit Rees; Writing by Saikat Chatterjee; editing by Sujata Rao

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