The British pound sank to a four-month low against the dollar Tuesday as slower-than-expected U.K. inflation prompted investors to dial back their bets on an early interest rate rise by the Bank of England.
The annual rate of inflation fell to 1.6% in July from 1.9% a month earlier, the Office for National Statistics said Tuesday. Economists polled by The Wall Street Journal had expected a more modest dip in price growth to 1.8%.
Sterling slumped 0.5% against the greenback to $1.6636, the lowest level since early April. The pound also dropped 0.4% against the euro.
The sluggish inflation data are the latest in a series of setbacks for the pound which hit a six-year high of nearly $1.72 in July as a burgeoning economic recovery had cemented the view the Bank of England would be the first major central bank to raise interest rates. Higher interest rates make a currency more attractive to investors.
"From the perspective of rate-hike timing, today's data are potentially significant," said Sam Hill, senior U.K. economist at RBC Capital Markets.
"With earnings growth so subdued and with inflation likely to remain below 2% for the rest of 2014, the likelihood is that the first [quarter percentage point] rate hike can be held off until February 2015."
BOE Governor Mark Carney had already disappointed sterling bulls by stressing the central bank was in no hurry to lift borrowing costs. Last week, Mr. Carney said officials were looking for signs of a pickup in meager wage growth before tightening monetary policy.
His comments also spurred a rally in U.K. government bonds, which benefit from ultra-low interest rates. A narrowing gap between bond yields in the U.K. and those in the U.S. has helped take some of the shine off the pound.
"It doesn't look good for sterling going forward, with a dovish central bank, weakening data, and bid fixed income," said a London-based sterling trader at Citigroup.
Market expectations for the timing of the bank's first rate rise have shifted dramatically in recent months. In June, bets linked to future interest rates were pricing in a rise in November. That has been pushed out to late March after Tuesday's inflation number, according to UBS fixed income strategist Joakim Tiberg.
"The BOE has shifted its focus to one of the very few remaining weak variables, which is wage growth," Mr. Tiberg said.
The Bank of England will publish on Wednesday the minutes of its latest policy meeting. Mr. Carney recently said there are a "range of views" among rate-setters.
If the minutes show a minority of officials are already in favor of rate rises, market expectations for the first rate increase could be pulled forward once more, Mr. Tiberg said.
