Sterling rallied to session highs near recent 26-year peaks versus the dollar on Thursday after the Bank of England raised interest rates as expected to 5.75 percent and said inflation risks remained to the upside. The BoE's move marked its fifth bout of monetary tightening since last August, raising the pound's yield appeal.
Sterling, with the highest interest rates among G7 countries, has benefited widely from investors' current preference for higher-yielding currencies over those with a lower interest rate like the Japanese yen. Explaining its decision to hike this month, the BoE said risks in the medium-term continued to lie to the upside and that most measures of pricing pressure remained elevated.
"Further rate hikes remain in prospect for the time being... with the penultimate paragraph of the MPC's statement noting that the balance of risks continued to lie on the upside," ING analyst Rob Carnell said. The pound hit a session high of $2.0202 - closing in on this week's 26-year peak hit at $2.0207, before retreating to $2.0132 by 1415 GMT, as the dollar got a boost from strong US data.
The euro was flat at 67.52 pence. Fifty-six of 70 economists polled by Reuters last week had expected a BoE hike this month. But some traders said subtle signs were present in the language used by the Bank of England's post-decision document - suggesting that rates might be peaking after this latest move.
"The statement says the outlook for inflation in the medium term continued to lie to the upside, the last time they hiked they said 'remain,' in this one - they used the past tense. Why change it unless you want to say something?," said Lee Ferridge, proprietary trader at Rabobank.
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