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By Tommy Wilkes
LONDON (Reuters) - Sterling rallied nearly 1% on Thursday after the Bank of England said two of its policymakers had voted for an early end to pandemic-era government bond buying and markets brought forward their expectations of an interest rate rise to March.
The pound rose to as high as $1.375, putting it on course for its biggest one-day move since June, after trading around $1.3686 before the BoE announcement.
The move higher only put sterling back at Monday's levels, however, after panic about Chinese developer Evergrande defaulting on its debts this week sent investors into safer assets and currencies.
Against the euro, the British currency extended its earlier rally and was last at 85.43 pence, 0.5% stronger on the session.
Britain's two-year bond yield, the most sensitive to interest rate moves, jumped around 9 basis points to 0.37%, its highest since March 2020.
The BoE, as expected, kept its main interest rate unchanged at 0.1% and stuck to its 895 billion pound ($1.22 trillion) asset purchase target.
Analysts said with the BoE flagging uncertainty around the inflation outlook and preferring to wait for more information before tightening, the meeting looked relatively dovish.
But investors jumped on news that policymaker Dave Ramsden had joined Michael Saunders in voting for an early end to the central bank's programme of government bond purchases even though policymakers voted unanimously to leave interest rates unchanged.
"The 7-2 vote is the beginning of a shift towards higher rates & boosts the chances that QE (quantitative easing) ends earlier than expected," said Neil Jones, London-based head of FX Sales for Financial Institutions at Mizuho.
Money markets brought forward their BoE rate hike expectations after Thursday's meeting, with an initial 15 bps hike from the record low of 0.1% now priced in for March 2022, from May previously.
"The text comments are looking more hawkish in mind. We should continue to see further pound strength across the board & in increase in the chance of rate hike."
Viraj Patel, a macro analyst at Vanda Research, noted markets now priced in a base rate of 0.5% by September 2022 from November 2022 before the meeting.
"That's 2 hikes by next year (15 bps + 25 bps) when the Fed is still tapering in this period. Only downside risks to this... and history suggests central banks tend to disappoint on tightening. Good time to fade $GBP," he said, suggesting traders should sell the pound versus the dollar at current levels.
Before the BoE decision, the pound had already traded higher on easing concerns about the Evergrande debt crisis.