By Carla Mozee, MarketWatch

LONDON (MarketWatch) -- U.K. stocks moved higher Wednesday, but the pound dropped sharply, as the prospects for an interest-rate hike before year's end year dimmed after the Bank of England slashed its view on wage growth.

The Bank of England in its quarterly inflation report said it now expects wages, on average, to increase by 1.25% this year. That view is half its previous wage-growth projection of 2.5%. The central bank has signaled it wants stronger wage growth before it begins raising its benchmark interest rate.

Ahead of the report, the Office for National Statistics said average weekly earnings, excluding bonuses, rose at an annual pace of 0.6%, which was slower than a FactSet-compiled projection of 0.7%. The government also said unemployment rate fell to 6.4% in the three months to June, in line with expectations for the rate to hit its lowest level since 2008. The unemployment rate was 6.5% in the three months to May.

Market reaction: Investors pushed the pound (GBPUSD) to an intraday low of $1.6700, according to FactSet data, as they considered the possibility that the key interest rate will stay at 0.5% through the rest of 2014. The currency pair late Tuesday traded around $1.6814. Sterling hasn't traded below $1.67 since mid-April.

But on the equities side, shares of interest-rate-sensitive banks rose further after the BOE report, with Royal Bank of Scotland advancing 2%, Barclays PLC up 1.5% and HSBC higher by 1.4%.

Home builders, a sector also sensitive to interest rates, gained as well. Barratt Developments picked up 1.4%, Taylor Wimpey advanced 1.8% and Persimmon added 0.9%.

The FTSE 100 strengthened after a choppy start, moving up 0.3% to 6,652.19. Miners were among session decliners, with Rio Tinto down 1.2% as the iron ore producer's shares traded without dividend rights. Shares of Glencore PLC were off 2.7%.

Views: Nick Beecroft, senior market analysts at Saxo Bank, pointed in an interview to Bank of England Gov. Mark Carney's comment that the monetary policy committee had a broad range of views on the remaining slack in the economy, or an economy's capacity to increase employment without increasing inflation.

That "broad range" in views "might be a hint that we will indeed see that at the August [policy] meeting there was dissent," on whether to hold the key rate at 0.5%, said Beecroft. Minutes from the meeting will be released on Aug. 20.

Beecroft said he still views an interest-rate increase as possible to take place before Christmas. "If we get robust employment figures again in September and other readings on the economy are looking good" -- and the bank views the ONS's figures on wages as understated -- "it's increasing likely that we see rate hikes in October, November or December."

The Bank of England had been expected to be the first central bank among the Group of Seven developed economies to raise interest rates, "but it is increasingly apparent that the BoE may keep rates on hold as long as the Fed," and that could push the pound/dollar pair toward the $1.6500 level over the medium-term horizon, said Boris Schlossberg, managing director of FX strategy, in a note.

"For now the pair appears to have found a modicum of support ahead of the 1.6700 figure but shorts may test that level," during Wednesday's North American trading session, he said.

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