Sterling slides after British PMIs point to contraction

(updates prices)

By Anirban Nag

LONDON, July 22 (Reuters) - Sterling fell 1 percent and gilts rose on Friday after surveys showed business activity had wilted in the wake of the Brexit vote, bolstering expectations the Bank of England will have to do more next month to stimulate growth.

Britain's benchmark stock index erased earlier losses to trade higher, boosted in part by a weaker currency, which should bolster exporters' earnings, and on hopes of more monetary stimulus.

The PMI (Other OTC: PMIR - news) survey of services sector purchasing managers fell to 47.4 in July from 52.3 in June, its steepest drop since records began in 1996 and the lowest reading since March 2009. Economists polled by Reuters had expected a much smaller fall to 49.2.

The manufacturing PMI fell to 49.1 from 52.1 in June, the lowest since February 2013. The composite index, which combines services and manufacturing, slumped to 47.7 from 52.4, the weakest since April 2009.

Markit (NasdaqGS: MRKT - news) said those levels were consistent with the economy shrinking at a quarterly pace of 0.4 percent, a rate of decline not seen since the 2008-09 recession.

Sterling fell more than 1 percent to $1.3085 down from $1.3270 beforehand and on track for weekly losses. The euro rose 1 percent to 84.19 pence, up from around 83.12.

"Sterling has been hit quite hard as you would expect in the aftermath of the very poor PMI figures," said Richard Wiltshire, chief FX broker, ETX Capital. "Data is going to be over-analysed in light of the Brexit decision and this data is disappointing."

Sterling has been supported this week by hawkish comments from two BOE policymakers. Kristin Forbes said on Thursday the central bank should not rush to cut interest rates, mirroring comments from Martin Weale, who also he was unsure if he would back a rate cut at next month's meeting.

That was at variance with the opinions of most other rate-setters. The BoE said last week that most of the nine members of its Monetary Policy Committee expected to give the economy more help at their next meeting in early August.

Money markets now show markets pricing in chances of at least two rate cuts in the next six months.

"The abysmal reading will mean the BoE will be sure to ease monetary policy at their August meeting, with both an interest rate cut and another round of quantitative easing likely," said Jake Trask, currency strategist at UKForex.

The 10-year gilt yields dropped to 0.825 percent, down one basis point. (Reporting by Anirban Nag and David Milliken; Additional reporting by Yumna Mohamed; Editing by Catherine Evans)