Pound dives to 22-month low against the dollar

The pound slid to a 22-month low against the dollar and was on track for its steepest monthly drop in over 11 years on Thursday as negative sentiment mounted on the economy, raising expectations for a rate cut.

The Bank of England's quarterly inflation report on Wednesday gave a gloomy prognosis for the economy, and said inflation would fall below the central bank's 2 percent target in two years if interest rates were held at 5 percent.

Inflation at more than double the Bank's target had kept expectations of rate cuts on the back-burner despite data showing the economy in poor shape and heading towards a possible recession.

But the central bank's suggestion that inflation is set to slide ramped up expectations for a rate cut by the end of the year, denting the currency's yield advantage.

At 12:54 p.m., the pound had recovered slightly to $1.8750, having earlier fallen as low as $1.8620, its lowest since October 2006. The euro was steady at 79.60 pence.