LONDON - Sterling rose on Thursday after the Bank of England flagged a modest slowdown in its bond-buying stimulus and predicted a much sharper rebound in the British economy thanks to easing COVID-19 restrictions.
The pound had initially dropped after the BoE said it had kept its interest rate on hold as well as the end-of-year target size of its bond-buying programme.
Minutes later though, sterling recovered to hit the day's high of $1.3942 , up 0.2% on the day, after the BoE announced a slowdown in the pace of those purchases and said it forecast economic growth of 7.25% in 2021, up from a 5% forecast in February.
Against the euro too, sterling recovered most of its losses and was last at 86.47 pence, down just 0.2%.
Britain's relatively successful COVID-19 vaccine rollout has allowed the economy to reopen faster than many had expected and with consumers and businesses stocked up on cash saved during the pandemic, economists are hiking their growth forecasts.
"The punchy cocktail of a reopening economy and excess consumer savings means that the UK economy should be set for a party for the remainder of the year," Ambrose Crofton, global market strategist at J.P. Morgan Asset Management.
"Any prospect of negative interest rates seems to have sailed for now" he added.
Slowing the pace of bond-buying represents a moderate step towards the moment when the BoE begins to reverse its emergency stimulus. The BOE said it would slow its purchases to 3.4 billion pounds between May and August, from the current 4.4 billion-pound weekly pace.
But a reversal is still seen as some way off -- most economists polled by Reuters last month pencilled in a first rate hike only in 2023.
"We had the initial headline that the overall purchase target was unchanged and that was greeted positively by markets given that there had been some speculation of a possible reduction in purchase volumes," said Richard McGuire, head of rates strategy at Rabobank.
"And then it appears that the market responded to the headlines that the BoE would slow the pace of bond purchases. As the dust settles, there are also upbeat macro economic forecasts as well but overall it is a modest response."
Two-year British government bond yields initially fell towards a two-week lOW, then rose back to stand 1.1 basis point higher on the day.
Thursday is a busy day for the UK with a series of local and regional elections. Dubbed 'Super Thursday', voting is underway in the Scottish and Welsh devolved parliaments as well as a clutch of local English council seats and a closely-watched parliamentary by-election in England's north east.
Of most interest to sterling traders is the Scottish election, where the pro-independence ruling Scottish National Party has vowed to call another referendum on breaking away from the United Kingdom if it wins a majority of seats.
Polls put the SNP significantly ahead of rivals but it could fall short of an outright majority.
(Additional reporting by Joice Alves and Dhara Ranasinghe Editing by Sujata Rao) ((firstname.lastname@example.org))