Sterling dives as Mark Carney lays the groundwork for an interest rate cut

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The pound fell to an intraday low against both currencies (Source: Getty)

The pound took a dive against the euro and the dollar this afternoon, after Bank of England governor Mark Carney laid the groundwork for an interest rate cut.

The pound fell as much as one per cent against the euro, to €1.1941, and 1.1 per cent against the dollar, to $1.3280, before beginning to edge up.

Meanwhile, the FTSE 100 climbed sharply, rising 1.5 per cent to 6,457 points, after a day lurching between gains and losses. The FTSE 250, which was badly dented by the Brexit vote, rose 1.4 per cent to 16,225 points.

With investors scrambling on the news, 10-year gilt yields tumbled to record lows. The yield on 10-year notes dropped over six basis points to below 0.89 per cent as Carney spoke.

In a speech at the Bank of England, Carney said the economic outlook had deteriorated.

"Some monetary policy easing will likely be required over the summer," he said.

"It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected. Moreover, its effects will be reinforced by tighter financial conditions and possible negative spill-overs to growth in the UK's major trading partners.

"In sum, the material slowing in growth that the MPC had identified as a risk associated with the referendum now looks likely to be our central forecast."

He added that as well as cutting interest rates even further from their historical low of 0.5 per cent, where they have stuck for more than seven years, the Bank was also prepared to consider quantitative easing.

Former Bank of England rate-setter Andrew Sentance, who now works for PwC, said he believes Carney has got it wrong.

“I’m not sure that a political shock justifies a loosening of monetary policy until you see the impact on the economy - I’d be voting to keep them where they are while stressing stability as the key message from the MPC," he said

"The best thing the Bank can do, which it is doing, is making sure the banks have access to enough liquidity. Moving closer to the negative rates environment is not good for the economy.”

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