Sterling Falls Sharply Ahead of Key Bank of England Rate Decision

Sterling is testing a three-year low against the US dollar following a reporting in the Financial Times that Chancellor George Osborne may be preparing to give a broader remit and extra powers to incoming Bank of England Governor Mark Carney.

The pound fell below 1.50 against the greenback ahead of Thursday's key interest rate decision from the Bank's Monetary Policy Committee as traders cited the FT report as an indication that Osborne would prefer to use looser monetary policy to revive Britain's economy than abandon his efforts to reduce spending and pare down debt over the long term.

Prime Minister David Cameron, in prepared remarks for a speech he will make later Thursday in the North of England, will say that "the very moment when we're just getting some signs that we can turn our economy round and make out country a success ... is the very moment to hold firm to the path we have set. The decisions we make now will set the course of our economic future for years to come. And while some would falter and plunge us back into the abyss we will stick to the course."

Vince Cable, the Conservative-led coalition party's business secretary and Liberal Democrat lawmaker, said earlier this week in an interview with the New Statesmen magazine that extra borrowing to fund certain infrastructure projects would not "undermine the central objective of reducing the structural deficit and may assist in reviving growth."

The FT says Treasury officials are discussing ways in which Osborne can re-draft both the overall remit of the Bank of England and give Carney more leeway on its current 2 percent inflation target - which Mervyn King admitted last month won't be met for at least another three years. The report says Osborne may unveil the changes during his 20 March Budget Statement.

"With all the shenanigans surrounding the impending arrival of Mark Carney as the next Governor, it is easy to lose sight of the underlying principles that should guide monetary policy," wrote Societe Generale economist Brian Hilliard in a note to clients published earlier this week. "We expect further sterling weakness in the short term, which will add to the inflation pressures. This will complicate the task of the MPC in the second half of the year, just as Carney arrives. The widespread expectation is that he will persuade his new colleagues to ease further but that will become increasingly hard to justify as the inflation forecast path is revised ever higher."

Sterling was quoted at $1.4986 Thursday, just 0.0001 from the two and a half year low it reached last week. Benchmark 10-year Gilt yields were around 2 basis points higher at 1.96 percent, according to the trading platform Tradeweb.

Analysts are divided as to how the MPC will vote at today's meeting and while a majority expects no change in the Bank's key lending rate or its £375bn programme of quantitative easing, a growing plurality believes the disappointing economic data will likely force the Bank into either adding more bond purchases or a further cut in interest rates.

Last month, King told reporters during a press briefing follow the Bank's Quarterly Inflation Report that while inflation was likely to remain well above the Bank's preferred target until at least 2016, the overall economy was simply too weak to allow him to raise interest rate to fight it.

"You might be tempted to think that an above-target inflation forecast justifies a tighter monetary policy, and certainly ensuring that inflation returns to target in the medium term is our primary responsibility and objective," said the outgoing Governor. "But the MPC's remit is to deliver price stability in the medium term in a way that avoids undesirable volatility in output in the short run. The prospect of a further prolonged period of above target inflation must therefore be considered alongside the weakness of the real economy."

Carney, the current governor of the Bank of Canada, kept that country's key lending rate at 1 percent Wednesday and issued a statement that indicated low rates would "likely remain appropriate for a period of time, after which some modest withdrawl will likely be required." Investors interpreted the statement as dovish, taking the Canadian dollar around 0.5 percent lower against its US counterpart in foreign exchange trading after the BoC announcement.