By Tom Wilson
LONDON (Reuters) -Sterling slipped on Thursday after the Bank of England kept - as expected - the size of its stimulus programme unchanged and left its benchmark interest rate at an all-time low of 0.1%.
Sterling fell 0.5% against the dollar to $1.3907, and also slipped the same amount versus the euro to as low as 85.92 pence. The pound had hit its highest level versus the single currency since early April a day earlier.
It was last down 0.3% versus the dollar at $1.3921.
The BoE's Monetary Policy Committee voted 8-1 to keep its government bond-buying programme at 875 billion pounds ($1.2 trillion). The MPC voted 9-0 to keep Bank Rate unchanged and to leave its 20 billion pound stock of corporate bond purchases unchanged.
It said growing inflation would surpass 3% as Britain's locked-down economy reopens, but the climb further above its 2% target would only be "temporary" and most policymakers favoured keeping stimulus at full throttle.
Britain's two-year gilt yield was down 1.2 basis points on the day at 0.07%, having traded at around 0.1% just before the BoE statement. Ten-year gilts yields were 2 bps lower at 0.75%.
"Today's policy statement suggests that the Bank of England has an incrementally more dovish reaction function than what was witnessed prior," said Simon Harvey, senior FX market analyst at Monex Europe. "This has weighed on sterling and gilts this afternoon."
Economists had expected no policy changes by the BoE as it waits to see if a post-lockdown jump in inflation proves transitory and whether unemployment rises when the government scales back its job-protection scheme.
"There is absolutely no sign in the minutes or statement that the MPC is considering an early end to QE," said Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.
"The response in the GBP to this MPC is entirely appropriate, though it's clear from the discussions that the broader MPC is taking the rise in inflation pressures more seriously."