Bloomberg News

Pound Falls Versus Dollar After GDP Growth Slows; Gilts Decline

October 05, 2011

Oct. 5 (Bloomberg) -- The pound fell against most of 16 major peers after a government report showed U.K. economic growth slowed more than analysts forecast last quarter, adding pressure on the central bank to keep interest rates low.

Sterling weakened versus the dollar, euro and yen on speculation the Bank of England will boost its program of bond purchases, or quantitative easing, as soon as its policy meeting tomorrow. The central bank will leave its main rate at a record low 0.5 percent at the gathering, according to economists surveyed by Bloomberg News. Ten-year gilts declined.

“Given where GDP is, I expect additional QE of some substantial size should and will arrive,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London “What I see happening is initially the pound lower, QE kicks into place and that continues the sterling trend lower, but then at some point we’ll start to see economic data pick up into next year.”

Sterling dropped 0.4 percent to $1.5429 at 4:36 p.m. in London. The pound weakened 0.3 percent to 118.56 yen and was little changed at 86.26 pence per euro.

GDP rose 0.1 percent from the first quarter, lower than the 0.2 percent previously published, the Office for National Statistics said today in London. Consumer spending plunged 0.8 percent, the most since the first quarter of 2009.

‘Pleasant Surprise’

A gauge of services index unexpectedly rose in September, Markit Economics and the Chartered Institute of Purchasing and Supply said today. Services activity based on a survey of purchasing managers gained to 52.9 from 51.1 in August, the report showed.

“It’s a pleasant surprise to see services PMI bounce off the 50 level,” said Mizuho’s Jones. “But I don’t sense that it’s sufficient to knock QE.”

The Bank of England will leave its debt-purchase program at 200 billion pounds tomorrow, according to the median estimate of 32 economists in a Bloomberg survey. One respondent forecast the bank will increase its purchases to 300 billion, with eight more estimating a raise to 250 billion.

Former policy maker John Gieve said the central bank needs to “take action” to boost economic growth and prevent credit conditions tightening further.

“We are facing a real potential crisis in Europe,” Gieve said in an interview on Bloomberg Television’s “On The Move” with Francine Lacqua. “At the very least I’d expect the bank to say they are ready to restart QE if this continues and Europe doesn’t get its act together.”

Gilt Yields Rise

The 10-year gilt snapped a four-day gain, with the yield increasing 11 basis points to 2.36 percent. The two-year rate was little changed at 0.58 percent, after dropping 25 basis points from 0.83 percent since the start of the third quarter.

Further stimulus may push gilt yields and the pound lower, according to a report today by John Hydeskov, chief analyst at Danske Bank A/S in London.

“U.K. interest rates can fall further, especially at the two- to five-year horizon, even though the yield curve already seems somewhat depressed,” he wrote. “The BOE printing money again can never be positive for sterling.”

The pound has declined 1.5 percent in the past six months and weakened 2.6 percent in the past year, according to Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies.

--With assistance from Keith Jenkins in London. Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: Lucy Meakin in London lmeakin1@bloomberg.net

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


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