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Pound Tumbles on Signs of New Monetary Stimulus

Alan Copson | Britain on View | Getty Images

The Bank of England's Monetary Policy Committee (MPC) was split 6-3 on more bond purchases earlier this month, unexpectedly reviving the prospect that the central bank might restart its quantitative easing program.

The pound fell to an eight-and-a-half month low against dollar at $1.5336, while the euro jumped to a 16-month high against the pound after the minutes from the Bank of England meeting were released.

Stocks rose, with the FTSE 100 index extending gains after the report, breaking through 6,400 and hitting an intra-day high.

Bank of England governor Mervyn King, executive director for markets Paul Fisher and external MPC member David Miles all voted for an increase in the central bank's bond purchases to 400 billion pounds from 375 billion pounds.

The last time there was a similar 6-3 split on the MPC was in June 2012, and the following month a majority of the MPC backed a 50 billion pound increase in asset purchases.

"This continues the snowball of gloominess which has been gathering pace against sterling with the downside risk now getting more worrying for the friendless pound, which currently stands at 16 month lows on a trade-weighted basis," Lee McDarby of Investec Corporate Treasury said in a note.

In recent months, only Miles had supported more bond purchases. By a small margin, economists polled by Reuters had not expected the central bank to restart its asset purchase program, due to persistent inflation and its hope that other stimulus like the Funding for Lending Scheme will prove sufficient.

Last weeks' inflation report had reinforced this view, as the central bank had forecast that inflation - currently at 2.7 percent - would not fall below its 2 percent target until early 2016, 18 months later than it predicted in November.

In a news conference to present the forecasts, Governor Mervyn King did not rule out more bond purchases but said the benefit they could provide to the economy was getting smaller.

King predicted a slow recovery over the next three years after two years of stagnation due to a mix of euro zone turmoil, government austerity and high inflation hurting on consumer spending.

At the meeting, the nine-member Monetary Policy Committee also voted unanimously to keep rates at the record low 0.5 percent where they have been since March 2009, and to reinvest the 6.6 billion pounds of a 4.5 percent 2013 gilt that will mature in March.