Bloomberg News

Pound Falls as Policy Makers’ Comments Bolster Bets on Low Rates

June 28, 2011

June 28 (Bloomberg) -- Britain’s pound fell against most of its major peers as traders pared bets on higher interest rates after three Bank of England policy makers signaled they’re concerned about the growth outlook.

Sterling declined versus the euro for a second day and depreciated most against the Brazilian real and Australian dollar. Adam Posen yesterday dismissed a call by the Bank of International Settlements for tighter monetary policy worldwide to tame inflation as “nonsense.” The U.K. central bank’s chief economist, Spencer Dale, said the recovery remains fragile, while David Miles said renewed tightening of credit conditions could inhibit demand for businesses.

“The time at which we start to see rates move higher is moving further and further away,” said Shant Movsesian, a strategist in London at 4Cast Ltd., a researcher that counts central banks among its subscribers. “The pound is likely to stay a bit weaker. There’s no real rush to buy it right now.”

The pound weakened 0.4 percent to 89.69 pence per euro at 4:32 p.m. in London. It was little changed at $1.6018 after falling as much as 0.5 percent earlier. Against the so-called Aussie, the pound depreciated 0.5 percent to A$1.5232.

Posen, who has voted since October to extend the Bank’s bond buying under the quantitative easing program, said in a speech in Aberdeen, Scotland, that there is “little or no credit growth, little wage growth beyond productivity, little evidence of rising inflation expectations” in the U.K.

Current Account

The pound stayed lower after a government report showed Britain’s current-account gap narrowed less than economists estimated in the first quarter. The deficit fell to 9.4 billion pounds in the January-March period from 10.5 billion pounds in the previous three months. The median forecast of 12 economists was for a shortfall of 4.7 billion pounds.

“There are still a lot of concerns over the U.K. economic outlook,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “Although I’m not convinced at this point that they will do more quantitative easing, the rising risks as the data disappoints should keep QE concerns behind the sterling downside.”

The British currency has fallen 8 percent in the past 12 months, making it the third-worst performer among 10 developed- market currencies after the U.S. and Canadian dollars, according to Bloomberg Correlation-Weighted Currency Indexes.

Inflation Expectations

Gilts declined as stock-market gains curbed demand for safer assets. The drop raised 10-year gilt yields by 10 basis points to 3.26 percent. The 3.75 percent security due September 2020 fell 0.79, or 7.9 pounds per 1,000-pound face amount, to 103.885.

The FTSE 100 Index advanced 0.8 percent while the benchmark Stoxx Europe 600 Index rose 0.5 percent.

Gilts have handed investors a 3.2 percent gain this year, compared with a 0.8 percent return from German debt and 3.4 percent from U.S. Treasuries, according to indexes compiled by the European Federation of Financial Analysts Societies.

The Bank of England has held its benchmark rate at a record low of 0.5 percent since April 2009 to support growth even as inflation rose to 4.5 percent in May, more than twice the government’s target.

The U.K. 10-year breakeven rate has fallen to 3.05 percentage points from 3.08 percentage points a month ago. The rate, a market gauge of inflation expectations, is derived from yield difference between regular and index-linked bonds.

Britain is selling 5 billion pounds of gilts due in 2060 in a syndicated sale, according to a banker involved in the transaction. The securities will be priced to yield 0.75 basis point below 2055 U.K. government bonds, the banker said.

--Editors: Mark McCord, Keith Campbell

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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