Bloomberg News

U.K. Pound Slumps After BOE Restarts Bond Purchases, Holds Rates

October 06, 2011

Oct. 6 (Bloomberg) -- The pound slumped against the dollar, euro and yen after the Bank of England reactivated its bond- purchase program and kept its benchmark interest rate at a record low to help revive the U.K.’s faltering economy.

Sterling declined against all of its 16 major peers as Britain’s monetary policy makers boosted the central bank’s quantitative-easing program by 75 billion pounds ($115 billion) to 275 billion pounds. Eleven of 32 economists surveyed by Bloomberg before the decision predicted an increase in asset purchases of at least 50 billion pounds. The main rate was maintained at 0.5 percent, as predicted by all 53 economists in a separate survey.

“It’s slightly bigger than we thought,” said John Hydeskov, chief analyst at Danske Bank A/S in London. “It’s definitely not good for the pound. We’re seeing a big weakening at the moment. I would say that this can continue to 87.50 pence” against the euro.

The pound dropped 0.5 percent to $1.5390 at 4:33 p.m. in London. Sterling fell 1 percent to 87.19 pence per euro and was 0.7 percent weaker at 117.89 yen. The U.K. FTSE 100 Index of shares climbed 3.7 percent, while the Stoxx Europe 600 Index rose 2.7 percent.

The central bank, which expects to complete the new round of purchases in four months, said in a statement that slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” It also said it is now “more likely” that inflation will undershoot its 2 percent goal in the medium term.

Economic Growth

The central bank has faced pressure to embark on further quantitative easing to help revive an economy battling the steepest government spending cuts since World War II and the worsening euro-area debt crisis.

The U.K economy grew less than economists forecast in the second quarter, expanding 0.1 percent from the previous three months, the Office for National Statistics said yesterday. That was lower than the 0.2 percent previously published and missed the 0.2 percent expansion forecast in a Bloomberg survey.

“The Bank of England is clearly very worried, given what it’s just done,” said Michael Riddell, a London-based fund manager at M&G Investments, which oversees the equivalent of about $323 billion of assets.

The central bank last announced an increase in its bond program in November 2009 and the purchases ended in early 2010.

Chancellor of the Exchequer George Osborne backed the Bank of England’s decision to expand its asset-buying program and stated that the central bank may buy private-sector securities as well as government bonds.

Rate Bets

“I am therefore writing to authorize an increase in the ceiling of asset purchases financed by the issuance of central bank reserves,” Osborne said in a letter to Bank of England Governor Mervyn King. The letter was released by the Treasury in London today.

The move is a “proactive surprise,” said Neil Jones, London-based head of European hedge-fund sales at Mizuho Corporate Bank Ltd., in an e-mailed comment. “I expect the pound to fall, whilst sending U.K. stocks, property assets and both producer and consumer confidence higher. We would expect further QE measures in the pipeline.”

Short-sterling futures rose, indicating investors are adding to bets that rates will stay lower for longer. The implied yield on the contract expiring in March fell two basis points to 1.03 percent.

U.K. government bonds decline with the 10-year gilt yield rising three basis points to 2.38 percent. The 3.75 percent security due September 2021 fell 0.225, or 2.25 pounds per 1,000-pound face amount, to 112.015. The two-year note yield climbed three basis points to 0.62 percent.

Gilts have returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing 8 percent for German bunds and 5.8 percent for French securities.

The pound has declined 2 percent in the past six months, according to Bloomberg Correlation-Weighted Currency Indexes, which measure a basket of 10 developed-market currencies.

--With assistance from Garth Theunissen and John Glover in London. Editors: Mark McCord, Matthew Brown

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

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


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