Caution over negative rates drags pound lower ahead of BoE

By Ritvik Carvalho

LONDON (Reuters) - Sterling fell to its weakest in two and a half weeks against the dollar on Thursday before a Bank of England meeting on caution about the possibility of negative rates, although a majority of analysts do not expect them to be introduced anytime soon.

Money market pricing shows the likelihood of negative rates being introduced as late as August 2021.

The BoE is expected to keep its benchmark interest rate on hold at 0.1% at 1200 GMT and refrain from a further increase in its bond-buying programme, which has doubled over the past year to nearly 900 billion pounds ($1.23 trillion).

Governor Andrew Bailey has said progress on COVID-19 vaccines - which have been rolled out in Britain faster than in the rest of Europe - was "outstandingly good news" and he predicted a pronounced economic recovery.

The BoE is due to publish on Thursday feedback from commercial banks about the operational feasibility of negative rates, which Bailey said would change the "whole calculus of how the banking system works" if implemented.

Officials with big British banks have said they would need a year to get ready for such a change.

Sterling fell half a percent against the dollar, dropping below the $1.36 mark to $1.3575, its lowest in two and half weeks.

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It traded flat against the euro, hovering around 88 pence per euro.

"The pound continues to trade lower versus the USD into the BOE meeting today on expectations of further reference to negative rates & linked survey results," said Neil Jones, head of EMEA FX sales at Mizuho Bank.

"Recent disappointing macro data & political headlines suggesting no early easing on lock down are weighing on the pound somewhat."

Britain's construction industry unexpectedly slid back into decline last month as the country re-entered a national COVID-19 lockdown, despite another strong performance from housebuilders, a survey showed on Thursday. The IHS Markit/CIPS Construction Purchasing Managers' Index (PMI) slipped to 49.2 from 54.6 in December, its lowest since May.

Brexit issues continued to simmer in the background. A report from HSBC UK and polling firm YouGov showed 40% of importers and 42% of exporters reported a hit from the end of the Brexit transition period.

Sterling has benefited from optimism over a speedy economic recovery owed to Britain's comparative lead versus other countries in COVID-19 vaccinations.

More than 10 million people in Britain have received the first dose of a COVID-19 vaccine, Health Secretary Matt Hancock said on Wednesday, describing the milestone as "hugely significant".

Graphic: COVID-19 initial vaccination dose administered, https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgykbypq/Pasted%20image%201612429993368.png

Sterling hit its highest against the dollar in two and a half years last week. Against the euro, it has hit its highest levels since May 2020.

"Given the current BoE market pricing, we think risks are skewed to the downside in EUR/GBP, especially since we expect the BoE to refrain from cutting the Bank Rate into negative territory, however without closing the door for it," said Jens Nærvig Pedersen, chief analyst, FX and rates strategy at Danske Bank. "We continue to have a positive view on GBP with the UK leading the European vaccination race."

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(Reporting by Ritvik Carvalho; additional reporting by Elizabeth Howcroft and Saikat Chatterjee, editing by Larry King)