Sterling fell to near a one-month low on Tuesday after the Bank of England said it was uncertain about the path to take to get British inflation back on track following higher than expected inflation data.
In a letter sent to the government after CPI rose to an annualised 3.3 percent, above the bank's 2.0 percent target, the BoE said markets would become too volatile if rates were set to bring prices back down to the target rate within 12 months.
BoE Governor Mervyn King blamed soaring fuel, food, gas and electricity prices for fuelling inflation, and said that as things stand, inflation is likely to rise sharply above 4 percent in the second half of the year.
King's letter suggested that the BoE was reluctant to raise rates to rein in inflation risks as consumer price inflation has risen to its highest since the Labour government came to power in 1997.
It also highlighted the bank's quandary, torn between the need to raise rates to tame price risks, and cutting them to jump-start a sluggish economy. Analysts said unlike the European Central Bank, which many see raising rates in July, the BoE has little room to manoeuvre. "The BoE is caught between a rock and the hard place...and there's growing realisation that the BoE isn't in the same position as the ECB to act on these inflationary pressures," said Simon Derrick, head of currency research at Bank of New York Mellon.
By 1402 GMT, sterling traded at $1.9492, 0.7 percent lower on the day. It initially hit a one-week high after the CPI figures, before reversing those gains to fall to a session low of $1.9470. The euro rose 0.8 percent to 79.49 pence, having hit a one-week high of 79.52 pence earlier in the day.
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