Bloomberg News

U.K. Pound, Gilts Decline as Bank of England Boosts Stimulus

October 08, 2011

Oct. 8 (Bloomberg) -- The pound fell against most of its major counterparts this week as the Bank of England reactivated its bond-purchase program, fueling concern that rising inflation will erode the value of the currency.

Sterling declined against the euro for the first time in three weeks as Britain’s monetary policy makers on Oct. 6 decided to boost the central bank’s quantitative-easing program by 75 billion pounds ($115 billion) to 275 billion pounds. The European Central Bank kept its benchmark rate unchanged at 1.50 percent and opted to support regional banks with one-year loans. Gilts declined on speculation the new round of stimulus will support growth.

“I would look for the pound to come under some renewed pressure,” said Derek Halpenny, head of European currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in London. “In the next few months, we are probably going to be in a position where the second round of quantitative easing coincides with annual-inflation rates drifting over 5 percent. That, to me, is quite a nasty mix.”

The pound weakened 0.6 percent from last week to 86.40 pence per euro as of 5:07 p.m. yesterday in London. It declined 0.1 percent to 119.98 yen and gained 0.2 percent to $1.5620. It fell the most against the Brazilian real and the Mexican peso.

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.

Growth Outlook

The Bank of England has faced pressure to embark on further quantitative easing to help revive an economy grappling with 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 central bank last announced an increase in its bond program in November 2009 and the purchases ended in early 2010.

U.K. government bonds declined for a second week, with the 10-year gilt yield rising four basis points to 2.47 percent. The two-year note yield climbed five basis points to 0.62 percent.

Gilts have returned 12.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing 7.3 percent for German bonds.

The pound has declined 1.2 percent in the past six months, according to Bloomberg Correlation-Weighted Currency Indexes, which measure a basket of 10 developed-market currencies.

--Editors: Matthew Brown, Mark McCord

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