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Sterling falls to 2-1/2-week low vs dollar before BoE meeting

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Feb 4 (Reuters) - Sterling fell to its weakest in two and a half weeks against the dollar on Thursday before a Bank of England meeting on caution about the possibility of negative rates, although a majority of analysts do not expect them to be introduced anytime soon.

Money market pricing shows the likelihood of negative rates being introduced as late as August 2021.

The BoE is expected to keep its benchmark interest rate on hold at 0.1% at 1200 GMT and refrain from a further increase in its bond-buying programme, which has doubled over the past year to nearly 900 billion pounds ($1.23 trillion).

Governor Andrew Bailey has said progress on COVID-19 vaccines - which have been rolled out in Britain faster than in the rest of Europe - was “outstandingly good news” and he predicted a pronounced economic recovery.

The BoE is due to publish on Thursday feedback from commercial banks about the operational feasibility of negative rates, which Bailey said would change the “whole calculus of how the banking system works” if implemented.

Officials with big British banks have said they would need a year to get ready for such a change.

Sterling fell half a percent against the dollar, dropping below the $1.36 mark to $1.3575, its lowest in two and half weeks.

It lost 0.1% against the euro, trading within ranges around the 88 pence mark.

“Although the Bank may formally lower its estimate of the lower bound to below zero next week, we don’t expect policymakers to hint that negative rates are imminent (particularly if the UK economy is set to start recovering from 2Q onwards), in turn having a limited impact on GBP today,” ING said in a note to clients.

The pound has benefited from optimism over a speedy economic recovery owed to Britain’s comparative lead versus other countries in COVID-19 vaccinations.

Last week, sterling hit its highest against the dollar in two and a half years. Against the euro, it has hit its highest levels since May 2020.

“Given the current BoE market pricing, we think risks are skewed to the downside in EUR/GBP, especially since we expect the BoE to refrain from cutting the Bank Rate into negative territory, however without closing the door for it,” said Jens Nærvig Pedersen, chief analyst, FX and rates strategy at Danske Bank.

“We continue to have a positive view on GBP with the UK leading the European vaccination race.” (Reporting by Ritvik Carvalho; editing by Larry King)

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