LONDON- The pound fell around 0.6% against the dollar and euro on Thursday after the Bank of England said it had been briefed on how a negative interest rate could be implemented effectively, should it be needed.

The Bank of England kept its main stimulus programmes on hold, as expected, and said that Britain's economy had performed better than expected.

Highlighting risks relating to rising COVID-19 cases, the unwinding of jobs protection schemes, and Brexit, the BoE said it was ready to take further action.

The bank also said that policymakers had been briefed on how a negative rate could be implemented "should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates." urn:newsml:reuters.com:*:nL8N2GE354

Sterling fell sharply after these comments, losing as much as 0.6% of its value as it fell as low as $1.2883 - a cent below where it had been before the statement.

At 1142 GMT it was at $1.2890, down 0.6% on the day, while euro-sterling was up 0.5% at 0.9158 EURGBP=D3 .

Gilt yields also fell, with the two-year yield down around 4.5 basis points on the day at 0.1% GB2YT=RR .

"It is clear that they are examining and lining up the tools they can deploy including more quantitative easing and negative rates if the economy diverges from their central scenario," said Kenneth Broux, a strategist at Societe Generale.

The BoE said that their base case is an "immediate, orderly move to a comprehensive free trade agreement with the European Union on 1 January 2021". 

"Now if that does not happen they will have no option but to respond," said Broux. "Sterling is a sell on rallies until there is a deal with the EU."

Brexit talks were thrown into disarray by Prime Minister Boris Johnson proposing legislation that would break international law by breaching parts of the Withdrawal Agreement relating to Northern Ireland.

The bill is moving through parliament this week. 

U.S. Democratic presidential candidate Joe Biden warned the UK that it must honour its commitments to Northern Ireland, or there would be no post-Brexit trade deal between the UK and United States.

Money markets ramped up their expectations of British interest rates entering negative territory.

Futures contracts maturing in February 2021 were pricing in policy rates falling below zero for the first time compared to March 2021 earlier.

(Reporting by Elizabeth Howcroft and Saikat Chatterjee, Editing by William Maclean and Chizu Nomiyama) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))