* Pound heads to new four-month low; slides 1 pct vs euro
* Market expectations for a 25 bp hike for 2018 drop back
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds quotes, details)
By Tommy Wilkes
LONDON, May 10 (Reuters) - The pound fell sharply on Thursday to a fresh four-month low against the dollar after the Bank of England held rates steady as expected but cut its growth and inflation projections for this year and next.
Sterling also dropped as much as one percent versus the euro , its biggest one-day fall in two weeks.
Analysts at UniCredit told clients they “expect the MPC (Monetary Policy Committee) to remain on hold for at least the rest of this year as we see growth and inflation weaker than the MPC expects.”
Markets still think there is more chance than not of a 25 basis point interest rate rise in 2018 but that probability fell on Thursday.
Sterling has tumbled in recent weeks from its post-Brexit vote highs of close to $1.44 to $1.35, erasing its gains against the dollar for the year as investors unwound bets on a rate increase and British economic data came in worse than expected.
Data published earlier on Thursday appeared to confirm that, showing industrial output inched up by 0.1 percent month-on-month in March, slightly below analysts’ forecasts for 0.2 percent growth.
Before the BoE rate announcement, sterling was up as much as 0.4 percent at $1.3618. But afterwards it fell to trade 0.2 percent lower on the day at $1.3521, and then extended to those falls to a four-month low of $1.3474.
It also weakened against the euro, with the single currency rising one percent to 88.35 pence.
“Cable broke below $1.35 and that filtered through to weakness against the euro,” said Lee Hardman, FX strategist at MUFG. “In the short-term, the risks are still to the downside,”
Bank of England Governor Mark Carney told reporters the bank’s earlier guidance on tighter policy had been conditioned on February inflation projections but the economy had not fulfilled those conditions.
He said the bank wanted to see a growth pick-up in coming months before raising borrowing costs.
Derivatives markets’ expectations of a rate rise later this year declined further after the BoE decision. They no longer price in a full 25 basis point rate rise in December, according to Reuters data.
“Inflation ‘cooling’ was a key word that caught our attention. Without inflation, absolutely no need to hike rates,” said Neil Jones, head of FX hedge fund sales at Mizuho.
“Not a surprise to see a no hike for 2018 being priced in. Pound should trend lower on this basis,” Jones added.
British government two-year bond yields fell five basis points, showing that investors have reduced their rate hike expectations.
MUFG’s Hardman said the market had “overreacted” in its assessment of the BoE’s decision, citing the meeting’s minutes that suggested most MPC members saw the need for a rate rise but wanted to see more data before they acted. (Additional reporting by Tom Finn and Saikat Chatterjee and Sujata Rao Editing by Hugh Lawson/Keith Weir)