Bloomberg News

Pound Weakens to Eight-Month Low as BOE Considers More Stimulus

September 21, 2011

Sept. 21 (Bloomberg) -- The pound weakened to an eight- month low against the dollar after Bank of England officials said they may need to buy more bonds to keep borrowing costs capped as the recovery falters.

Sterling fell for the first time in four days versus the euro as policy makers said in minutes of their Sept. 8 meeting that growth in the second half of 2011 may be “materially weaker” than projected in August. U.K. Business Secretary Vince Cable repeated a call for the central bank to buy assets other than government bonds. The pound declined earlier after an industry report showed consumer confidence dropped to a four- month low in August. Ten-year gilts fell.

“The Bank of England is making clear that further measures will be used if the situation worsens, and therefore the pound reacted negatively to the minutes,” said You-Na Park, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “The outlook for the U.K. and the global economy is very uncertain and there are a lot of downside risks.”

Sterling declined 0.8 percent to $1.5607 at 4:01 p.m. in London, after earlier falling to $1.5579, the weakest level since Jan. 11. The currency depreciated 0.7 percent to 87.70 pence per euro, and slid 0.9 percent to 119.28 yen.

Most of the nine-member Monetary Policy Committee said an expansion of the 200 billion-pound bond purchase program was “increasingly probable,” the minutes showed. The committee voted 8-1 to maintain the current size of the plan and was unanimous in keeping the benchmark at a record low 0.5 percent.

Sterling ‘Exposed’

Officials considered ways of loosening policy, including “changing the maturity of the portfolio of assets held” and “revisiting the earlier decision” not to cut the interest rate below 0.5 percent.

“The shift in the discussion of the MPC has moved more than the market was anticipating,” said Ian Stannard, London- based head of European foreign-exchange strategy at Morgan Stanley. “Sterling is increasingly going to become exposed to the global slowdown.”

The pound has depreciated 5.4 percent in the last 12 months, making it the worst performer among 10 developed-market currencies according to Bloomberg Correlation-Weighted Currency Indexes. Morgan Stanley predicts the U.K. currency will weaken to $1.53 by year-end.

Short-sterling futures extended gains after the minutes were released. The implied yield on the June 2012 contract dropped three basis points to 0.86 percent, signaling traders added to bets for lower interest rates.

Buy Corporate Debt

“The Bank of England could do what the Americans did and buy up corporate bonds or they could buy up bundles of SME loans,” Cable said yesterday in Birmingham, central England, referring to small and medium-sized businesses. “That’s an idea that I think is an excellent one.”

Investors are betting the Bank of England will refrain from raising interest rates until after July next year, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average, or Sonia, show.

Nationwide Building Society said its index of consumer sentiment slipped 1 point in August from the previous month to 48. A gauge of consumers’ future expectations for the economy in the next six months declined 1 point to 65.

U.K. government bonds snapped a three-day gain with the 10- year yield climbing one basis point to 2.39 percent. The two- year rate was little changed at 0.53 percent.

Britain had its biggest budget deficit for any August since modern records began in 1993 as government spending jumped and income-tax receipts declined, the Office for National Statistics said today. The shortfall of 15.9 billion pounds compared with 14 billion pounds a year earlier.

--Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net.

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


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