* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: sterling year-to-date tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Oct 26 (Reuters) - Sterling recovered to around $1.22 on Wednesday, having fallen below $1.21 the previous day, as expectations for an interest rate cut next week faded.
Bank of England Governor Mark Carney prompted the strengthening by saying in a speech the BoE could not ignore the pound’s “fairly substantial” drop since the vote to leave the European Union.
Carney said there were limits to the central bank’s ability to overlook the effect of the steep slide - about 18 percent since the Brexit - on inflation, and it would “undoubtedly” take it into account at its rate-setting meeting next week.
In early September the BoE said it was likely to cut rates again this year if the economy slowed as it expected. But sterling’s weakness and unexpectedly robust economic data have prompted most to rule out a Nov. 3 cut - around three quarters of the 60 economists polled by Reuters in the past few days expect rates to stay at 0.25 percent for the rest of the year.
In the run-up to Carney’s speech, sterling had fallen to as low as $1.2082, its weakest since Oct. 7, when a “flash crash” wiped as much as 10 percent off the currency’s value in a matter of minutes.
Following Carney’s comments, the pound rebounded to close the day more than a cent above its lows. It inched a little higher still on Wednesday, up 0.1 percent on the day at $1.2205 by 0840 GMT. Against the euro, it was flat at 89.435 pence .
“Sterling has regained some ground after (Carney’s) comments, as many saw them as an indication that the BoE will leave policy unchanged...next week,” wrote Credit Agricole currency strategists in a note to clients.
“Further underpinning the pound is the assumption that the economy will not need another shot of monetary stimulus anytime soon. If that were not the case and the BoE had to ease but were unable to for fear of fuelling inflation, the sterling response would have been negative... This would have been the stagflation scenario that Carney is trying to avoid at any cost.” (Editing by Jeremy Gaunt)