Bloomberg News

Pound Declines to Two-Week Low Versus Euro After BOE Minutes

June 22, 2011

June 22 (Bloomberg) -- The pound fell to the lowest in two weeks versus the euro as minutes released today from the Bank of England’s most recent meeting showed more policy makers voted to keep interest rates at a record low this month.

Sterling was weaker against 15 of 16 major counterparts tracked by Bloomberg. Ten-year gilts rose, pushing the yield to the lowest in seven months, as the minutes said officials voted 7-2 to hold rates and some saw the possibility of more bond purchases to counter weaker growth and inflation. Short-sterling futures rose as investors curbed bets on higher borrowing costs.

“This is, on balance, a dovish minutes,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “It’s consistent with a market view that the central bank will keep interest rates at the current level for a while because of the downside risks to the economy. That will weigh on the pound.”

Sterling depreciated 0.8 percent to 89.43 pence per euro as of 4:25 p.m. in London after reaching 89.47 pence, the weakest since June 8. Sterling depreciated 0.6 percent to $1.6146 and fell 0.8 percent against the Japanese currency to 129.16 yen.

The pound has lost 6.5 percent in the past 12 months, according to Bloomberg Correlation-Weighted Currency Indexes, which track the currencies of 10 developed markets, making it the third-worst performer after the U.S. and Canadian dollars.

Gilts Rise

Ten-year gilt yields fell three basis points to 3.19 percent after dropping to 3.15 percent, the lowest since November. The yield on two-year notes dropped four basis points to 0.76 percent.

Gilts outperformed German bonds this year, handing investors a 2.7 percent return compared with a 0.2 percent gain from bunds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

U.K. monetary policy makers, led by Governor Mervyn King, held rates at a record low 0.5 percent on June 9 to support the economy, even as inflation held at the fastest pace since October 2008 last month. Minutes of the meeting showed that Chief Economist Spencer Dale and Martin Weale continued a push for a quarter-point increase in the benchmark rate.

King and the other six members of the Monetary Policy Committee, including Ben Broadbent, voted for no change. Adam Posen kept up a call for more bond purchases. Broadbent replaced Andrew Sentance, who had been calling for a half-point increase.

In May, the committee voted 6-3 to keep rates on hold.

Gilts also rose as investors sought safe-haven assets amid concern that Greek Prime Minister George Papandreou may have difficulty pushing through parliamentary approval next week of a 78-billion euro ($112 billion) package of budget cuts to stave off the threat of default.

Rate Expectations

The extra yield investors demand to hold 10-year Greek debt instead of German bunds rose to 13.9 percentage points today from 13 percentage points at the end of last month.

While U.K. inflation was 4.5 percent in May, more than twice the central bank’s target, King said last week that the current price surge is temporary. He defended keeping the key rate on hold to aid the economic recovery during the government’s budget cuts. Markets Director Paul Fisher said yesterday that adding to the bank’s bond program remains “very much on the table” as a policy tool.

Investors pushed back bets that the Bank of England will increase interest rates to later than May, according to forward contracts on the sterling overnight interbank average.

Pimco Comments

The central bank will refrain from raising its benchmark rate by 25 basis points to 0.75 percent until after May 2012, data from Tullett Prebon Plc shows. As recently as yesterday, traders were betting on an increase in that month.

Pacific Investment Management Co. recommended avoiding non- inflation-linked U.K. gilts because the central bank will keep rates down to boost the economy and allow consumer prices to exceed its target.

“The Bank of England is right to be cautious on raising the bank rate given the current state of the economy,” Mike Amey, an executive vice president at Pimco Europe Ltd., wrote in a report on the company’s website today. “This may be a good policy framework for dealing with high levels of nominal debt, but as a bond investor faced with 10- or 30-year gilts yielding 3.3 percent and 4.2 percent, respectively, this does not seem like an opportune time to lock into those yields.”

Investors should look to other assets, including index- linked bonds or shorter-maturity higher-yielding assets, to ensure they are “adequately compensated for inflation risks,” he wrote.

U.K. five-year breakeven rate fell seven basis points to 2.55 percentage points today, the lowest since Jan 5. The rate, a gauge of market inflation expectation is derived from a yield gap between regular and index-linked bonds of the same maturity.

--Editors: Keith Campbell, Mark McCord

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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