January 21, 2015 / 10:46 AM / 5 years ago

Sterling drops after BoE dissenters' U-turn on interest rates

(Updates, adds details, quotes)

By Anirban Nag

LONDON, Jan 21 (Reuters) - Sterling fell towards 18-month lows against the dollar on Wednesday, after minutes from the latest Bank of England policy meeting showed two members had dropped their call for a hike in interest rates.

As a result, investors pushed back chances of the first interest rate hike to around 18 months from now, compared with around 15 months that being factored in just a few days ago. .

External members of the BoE’s Monetary Policy Committee Martin Weale and Ian McCafferty, who since August had called for an end to record-low interest rates, said a rate rise now might cause below-target inflation to become entrenched.

As a result, they dropped their call for higher rates and the committee voted 9-0 for rates to stay low, compared with the consensus forecast for a 7-2 vote in favour of holding them.

Sterling fell to the day’s low of $1.5076, from around $1.5143, down 0.4 percent and not far from a trough of $1.5034 struck in early January and the pound’s lowest level since July 2013.

Sterling fell to 76.805 pence per euro after the minutes from around 76.42 pence per euro beforehand.

“Two more policymakers have voted for no change and that means there is unlikely to be a rate hike over the next 12 months,” said Manuel Oliveri, FX strategist at Credit Agricole.

“It aligns the market thinking with that of the MPC.”

Sterling has suffered as the markets pushed back their forecasts for when the BoE will raise rates towards 2016. Only a few months ago, many in the market had been expecting a rate hike in early 2015.

Separate data showed the pay of British workers grew faster than inflation again in November, while the unemployment rate fell to 5.8 percent, its lowest in more than six years and below a forecast of 5.9 percent in a Reuters poll.

Traders said a decisive event for the pound was likely to be the fallout from Thursday’s decision by the European Central Bank on whether to embark for the first time on outright money-printing to revive a moribund euro zone economy.

That should keep losses in sterling against the euro pretty much limited.

“Sterling is likely to brush off the fact that interest rates won’t rise this year and we expect it to continue to outperform the struggling euro,” said Andy Scott, associate director at HiFX. (Editing by Alison Williams)

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