Earlier figures showed retail spending rose by a "disappointing" 0.9 percent in the final quarter, which includes the crucial Christmas period, compared with a year earlier, the slowest such rise for more than a year. The data prompted J.P. Morgan to push back its forecast for a first rise in UK interest rates until the end of this year, the latest major bank to do so.
The pound fell 1 percent on the day to $1.4378 after the output data, its weakest since June 2010. That took losses to more than 5 percent over the past month, when concerns about a referendum on Britain's future in Europe and revisions to Bank of England rate hike expectations have weighed. Barclays' head of currency strategy Marvin Barth noted production data had been weak elsewhere too.
"(But) it's clearly not coming at a good time, when sterling is under a lot of pressure, when referendum fears are mounting, when there are concerns about fiscal policy." The pound also fell by 1 percent to 75.455 pence per euro, close to an 11-month low hit the previous day. On a trade-weighted basis it hit an eight-month low. "Combined with soft growth figures and Brexit fears, today's data will likely dampen any expectations of a UK rate rise in the near future," said Jake Trask, currency analyst at UKForex. Investors had previously bet UK rates would rise in the second half of this year, following the US Federal Reserve, which last month hiked rates for the first time since 2006. But they now do not expect a hike in the UK until early 2017. The BoE's monetary policy committee (MPC) meets on Thursday and the subdued activity data and turmoil in global markets is likely to weigh on policymakers.