LONDON: Sterling rose to a six-day high against the dollar on Thursday after Bank of England policymakers voted unanimously to keep interest rates unchanged, quashing talk that one or two might vote in favour of a cut.
BoE Governor Mark Carney called Britain's referendum on European Union membership the "elephant in the room", telling a news conference after the rate decision that this was the most significant risk to its growth and inflation forecasts .
In its quarterly inflation report, published simultaneously with the rate decision, the BoE stepped up warnings about the economic risks of a Brexit, saying sterling could weaken and unemployment would probably rise.
But it also said the economy would fully recover from the damage if Britain voted on June 23 to stay in the EU. The BoE cut its growth forecast for this year to 2.0 percent from 2.2 percent in February, reflecting how uncertainty about the referendum is already weighing on the economy.
"There had been some speculation that there might be a more dovish vote, and so when the numbers came out, sterling jumped," said Societe Generale currency strategist Alvin Tan, referring to the 9-0 vote by BoE monetary policy committee members to keep rates at their record lows.
"That, in combination with the fact that the euro has lost a bit of ground today and that's pulled down euro/sterling, has boosted the pound," he said. By 1530 GMT, the pound was trading at $1.4480, up 0.2 percent on the day, having reached a high of $1.4532. Against the euro, the pound strengthened to 78.46 pence , its strongest in nine days, before easing to 78.66 pence, up 0.5 percent on the day.
"If you strip out all of the Brexit stuff, not a lot has changed," said ING currency strategist Viraj Patel. Although Carney had painted a slightly more bearish picture than the inflation report, he said, that was probably because of the line of questioning from reporters.
Carney said that a "technical recession" was possible in the event of a Brexit, but that was not the base-case scenario.
In two years' time, the BoE said, inflation is forecast to reach a fraction over the bank's 2 percent target, essentially unchanged from the forecast in February.
Since then, financial markets have pushed back their assumption on when interest rates will rise to early 2019 from late 2017 - in part because they price in a risk of Britain leaving the EU. Most economists still expect the central bank to raise rates early next year if Britain stays in.
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