Two rate increases in three months means the Bank may not have to raise interest rates as much as previously anticipated to tame growth and keep a lid on inflation, analysts said. The Bank lifted its key repurchase rate to 5.5 per cent last Thursday.
"We see sterling weakening," said Michael Hume, a UK economist at Lehman Brothers International. "The perception of the rate move is `a stitch in time saves nine'. Rates won't have to go as high [as we previously expected]," he said.
On Friday, the pound dropped below $1.62 for the first time since 17 September, falling as low as $1.6186 and bringing its decline in the past two weeks to more than 3 per cent. It also fell against the euro, leaving the single currency at pounds 0.6414. That's equivalent to a pound-mark rate of DM3.05.
The prospect of fewer rate increases could deter investors from buying sterling because the return on sterling deposits won't rise as much as previously expected.
The interest rate advantage of three-month pound deposits over their euro counterparts has already narrowed 41 basis points since the start of October.
While a recent report has revealed house prices rising at their fastest rate in 11 years, there is little proof that those increases are feeding through into consumer prices.
"We find it difficult to see inflation anywhere," said Mark Parry, who helps oversee about pounds 9bn at Hill Samuel Asset Management. Furthermore, he said: "We would be looking to lower our forecast for growth [after the Bank of England's rate increase on Thursday]."
In one indication that traders are expecting fewer increases, the implied yield on the June interest rate futures contract fell 9 basis points to 6.34 per cent, bringing its decline in the past nine trading days to 55 basis points.
The gap between that rate and the current three-month lending rate of 5.94 per cent suggests that traders and investors are anticipating about one more quarter-point increase in Bank of England rates before that contract expires.
More details on the inflation outlook will come on Monday as the Government reports on producer prices in October. The prices UK manufacturers charge for their goods probably rose just 0.1 per cent in October, compared with a 0.3 per cent rise in September, according to economists surveyed by Bloomberg News.
And on Wednesday, the Bank of England releases its quarterly inflation report.
The Government's favoured inflation yardstick - the rise in retail prices minus mortgage interest payments - has been below the target 2.5 per cent rate every month since April.
Meanwhile, the dollar rose on Friday to a 2.5-week high against the yen, boosted by soaring US stocks and bonds after a US jobs report allayed concern that Federal Reserve policy makers will raise interest rates in a meeting this month.