Sterling fell from an earlier 4-week high versus a basket of currencies on Thursday after the Bank of England broke with tradition and issued a statement despite holding interest rates at 5.75 percent as expected.
The BoE does not usually comment after leaving policy unchanged. So the fact that the recent shakeout in financial markets pushed it to speak out was taken as a bearish signal by investors. The bank said it was too early to tell how much consumers and companies would suffer from the storm on world financial markets, but added that inflationary dangers still lurked and the economy was running close to its limits.
"It's a combination of the fact that they felt it necessarily to say anything at all and also there was some hope that they will announce some liquidity boosting measures and there wasn't, so that's sterling negative," said Adam Cole, senior currency strategist at RBC Capital Markets. By 1405 GMT sterling was flat on the day at $2.0189, having retreated from an earlier 4-week high of $2.0263.
It was down 0.2 percent versus the euro at 67.69 pence. The European Central Bank also held rates as expected on Thursday, without committing to hiking in the future. Against a trade-weighted basket of currencies sterling fell to 104.30 from a 4-week high of 104.80.
The BoE has only issued a statement to accompany a no-change rate decision twice before - in September 1998 as the emerging markets financial crisis was in full swing and in May 1999 when policymakers were worried about the pound shooting up.
It cut rates both times in the following month, though analyst said this would not necessarily be the case now. "It is clear that the MPC still has concerns about the medium term outlook for inflation, and the statement does not indicate by any means that the MPC is about to ease. But it does suggest that the MPC will be prepared to respond if they see a significant change to the macroeconomic outlook," J.P. Morgan aid in a research note.
Earlier in the session, sterling came under pressure after data showed industrial and manufacturing output unexpectedly fell on the month in July. But analysts said activity could improve later in the year, highlighting upbeat reading from August surveys, such as the manufacturing Purchasing Managers' Index earlier this week.