The British pound on Thursday recorded its largest slump in more than two weeks after the Bank of England hinted it could raise interest rates if inflation accelerates too quickly.
Sterling GBPUSD, +0.4493% rose 1.2% to $1.2455 late Thursday in New York, its largest daily jump since Oct. 18. By comparison, it traded at $1.2305 late Wednesday. On Friday it continued the upward trend.
In its quarterly inflation report, the Bank of England warned “there are limits to the extent to which above-target inflation can be tolerated,” which, market strategists said, opened the door to a possible rate increase next year. However, the central bank also noted that tightening policy to combat inflation could be costly.
The weakness in the pound has pushed consumer prices higher by increasing the cost of imported goods. According to the U.K. consumer price index, prices rose at an annualized rate of 1% in September. The BOE, which maintains an inflation target of 2%, projects that price increases will accelerate above its target in 2017.
The central bank also left its benchmark interest rate on hold, as was widely expected.
The inflation report “very much supports the view that the BOE isn’t ready to consider lower rates any time soon,” said Manuel Oliveri, a currency strategist at Credit Agricole. Typically, lower interest rates cause a currency to weaken by decreasing the return on deposits denominated in that currency.
Expectations for another BOE rate cut have waned in recent months as the impact of the Brexit vote on the U.K. has been relatively benign. On Thursday, a reading on services-sector activity came in stronger than expected, confirming that the BOE has little justification for another cut.
The pound also benefited from a ruling by the U.K. high court, which said the government of Prime Minister Theresa May would need to seek Parliament’s approval before beginning the Brexit process. The ruling will likely delay the Brexit process, Oliveri said.
In addition a strong reading on services sector activity in the U.K. confirmed that a feared economic slowdown has yet to materialize.