Pound eases after MPC minutes

The pound lost ground against the dollar on Wednesday after the release of the minutes of the Bank of England's monetary policy committee suggested the central bank was not set to follow the Federal Reserve with an aggressive cut in UK interest rates.

The Fed implemented an emergency 75 basis point cut in its Fed funds rate to 3.5 per cent on Tuesday in a bid to stem a violent sell-off in global equity markets.

However, the minutes of the Bank of England's January monetary policy committee meeting revealed an 8-1 vote in favour of keeping rates on hold, with the only dissenter David Blanchflower, who has consistently expressed a dovish view on interest rates.

The minutes revealed that worries over inflation had been behind the decision, with members worrying that back-to-back cuts in UK interest rates would signal the central bank was now targeting demand rather than inflation.

Furthermore, the committee said that some UK monetary easing had already been affected via a weaker pound.

Neil Mellor at Bank of New York Mellon said the expected deterioration in short-term inflation would probably mean that the Bank of England was unable to implement rate cuts at a pace that would soothe market fears over the prospects for the UK economy.

"We strongly suspect the pound will continue on its downward path against both the euro and the dollar," he said.

"The 2007 low of $1.9217 against the greenback is only one or two poor data releases away."

The pound fell 0.2 per cent to $1.9579 against the dollar and dropped 0.6 per cent to Y207.69 against the yen.

However sterling rose 0.1 per cent to £0.7454 against the euro.

The euro lost ground after a survey suggested the eurozone economy was set to weaken, strengthening the view that the European Central Bank might have to abandon its hawkish stance on interest rates.

The eurozone purchasing managers' index fell from 53.3 last month to 52.7 in January, lower than consensus and implying growth slowed below its trend rate at the start of the year.

Marco Valli at UniCredit said while the data might not change the ECB's hawkish rhetoric in the very near term, it was becoming increasingly clear that eurozone growth has started to slide.

"We suspect the pace of weakening will intensify in coming quarters as manufacturing starts feeling the pain of currency appreciation and slowing world growth," he said.

"A more cautious ECB stance seems warranted at this stage. We expect them to start cutting rates sometime in the third quarter."

The euro eased 0.2 per cent to $1.4595 against the dollar and dropped 0.6 per cent to Y154.83 against the yen.