LONDON- The British pound and government bond yields fell on Thursday, while London's benchmark FTSE stock index rallied after the Bank of England left policy steady just as other major central banks start to position for the end of emergency stimulus.
The BoE kept the size of its stimulus programme unchanged and left its benchmark interest rate at an all-time low of 0.1% as widely expected despite inflation zipping past the central bank's targets in May.
Last week, the U.S. Federal Reserve began to move towards reducing its pandemic stimulus by signaling its first rate hike in 2023, a year earlier than previous projections, putting the focus on what other central banks might do next.
"The belief is that current levels of higher inflation are nothing more than transitionary and there is plenty of slack in the economy," said Jon Hudson, fund manager at the Premier Miton UK Growth Fund.
As markets expressed relief that the BoE was steering clear of a hawkish shift for now, sterling fell to the day's lows at $1.3907, down 0.4%.
It weakened by a similar magnitude to 85.90 pence per euro. The pound had rallied to more than two-year highs above $1.42 at the start of June.
Britain's two-year gilt yield was down 1.2 basis points on the day at 0.07%, having traded at around 0.1% just before the BoE statement.
Ten-year gilts yields were 2 bps lower at 0.75%.
The blue-chip FTSE stock index extended its gains and was last up 0.5% .FTSE . British banking stocks were up 0.4%.
"On the whole, today’s policy statement suggests that the Bank of England has an incrementally more dovish reaction function than what was witnessed prior," said Simon Harvey, senior FX market analyst at Monex Europe.
(Reporting by London Markets Team; Writing by Dhara Ranasinghe; Editing by Saikat Chatterjee) ((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))