LONDON (Reuters) - Sterling edged up against the U.S. dollar but fell versus the euro on Wednesday as clouds lingered over the pound after UK inflation fell below 1% to its lowest in nearly four years.
The drop in inflation fuelled speculation that the Bank of England (BoE) would cut interest rates below zero to bolster an economy hammered by the coronavirus pandemic.
Inflation sank to 0.8% in April, its lowest since August 2016. The pound fell after the release of the data.
Sterling then recovered as the dollar fell, last trading up 0.1% against the dollar at $1.2263.
The British currency softened, however, against a broad-based stronger euro, touching 89.69 pence versus the common currency, its weakest since March 31. The euro rose after euro zone consumer confidence rose by 3.2 points in May from the April number.
“With inflation significantly below the BoE’s 2% target, we can expect the negative rates discussion to pick up at the June monetary policy meeting,” said Fiona Cincotta, an analyst at trading platform GAIN Capital.
Earlier on Wednesday Britain sold a government bond that pays a negative yield for the first time - meaning investors would be repaid less than they lent, so the government is effectively being paid to borrow.
The BoE is looking carefully at the experience of other central banks with negative interest rates, its governor, Andrew Bailey said on Wednesday, but for the time being it wants to see how Britain’s economy responds to rate cuts it has already made.
Kit Juckes, macro strategist at Societe Generale, said it would be a bad idea for the BoE to lower rates below zero.
“Personally, I can’t think of an economy where negative rates are a worse idea than the UK,” he said.
“The Chancellor has dramatically increased government borrowing and the Bank of England is buying the economy time by mopping most of it up ... How on earth does it make sense to even consider adding negative rates to the mix?”
Negative rates would push the British currency lower and “if the pound falls enough, it will make quantitative easing harder,” Juckes said.
The pound is in the lower band of its recent trading range, as Britain remains one of the countries most affected by the pandemic, with more than 35,000 deaths and nearly 250,000 infected.
For a graphic on Sterling at bottom of trading range:
Reporting by Olga Cotaga; editing by Larry King and Gareth Jones