By Tommy Wilkes
LONDON (Reuters) -Sterling gave up earlier gains on Thursday, as the Bank of England predicted a sharper rebound in the British economy thanks to easing COVID-19 restrictions but said it needed clear evidence of a recovery before tightening policy.
The BoE also announced a modest slowdown in its bond-buying stimulus and said this "should not be interpreted as a change in the stance of monetary policy".
The pound struggled to digest the BoE announcements, dropping initially before rising on the bond-buying slowdown and then weakening again.
By 1600 GMT, sterling was 0.2% weaker at $1.3883 and down 0.6% versus the euro at 86.79 pence.
Britain's relatively successful COVID-19 vaccine rollout has allowed the economy to reopen faster than many had expected and with consumers and businesses stocked up on cash saved during the pandemic, economists are hiking their growth forecasts.
The BoE said it now forecast economic growth of 7.25% in 2021, up from a 5% growth forecast in February, while predicting that inflation would remain contained even with the accelerating recovery.
"The punchy cocktail of a reopening economy and excess consumer savings means that the UK economy should be set for a party for the remainder of the year," Ambrose Crofton, global market strategist at J.P. Morgan Asset Management.
"Any prospect of negative interest rates seems to have sailed for now" he added.
Slowing the pace of bond buying represents a moderate step towards the moment when the BoE begins to reverse its emergency stimulus. The BOE said it would slow its purchases to 3.4 billion pounds between May and August, from the current 4.4 billion-pound weekly pace.
But a reversal is still seen as some way off — most economists polled by Reuters last month pencilled in a first rate hike only in 2023 and markets are now pricing about 20 basis points of hikes by end-2022.
"We had the initial headline that the overall purchase target was unchanged and that was greeted positively by markets given that there had been some speculation of a possible reduction in purchase volumes," said Richard McGuire, head of rates strategy at Rabobank.
"And then it appears that the market responded to the headlines that the BoE would slow the pace of bond purchases. As the dust settles, there are also upbeat macro economic forecasts as well but overall it is a modest response."
Two-year British government bond yields initially fell towards a two-week low, but then rose back to stand 1.1 basis point higher on the day.
ELECTIONS
Thursday is a busy day for the UK with a series of local and regional elections. Dubbed 'Super Thursday', voting is underway in the Scottish and Welsh devolved parliaments as well as a clutch of local English council seats and a closely watched parliamentary by-election in England's north east.
Of most interest to sterling traders is the Scottish election, where the pro-independence ruling Scottish National Party has vowed to call another referendum on breaking away from the United Kingdom if it wins a majority of seats.
Polls put the SNP significantly ahead of rivals but it could fall short of an outright majority.