Bloomberg News

Pound Falls on BOE Growth Outlook; Gilt Yield Falls to Record

November 16, 2011

Nov. 16 (Bloomberg) -- The pound weakened versus the dollar as the Bank of England said Britain faces a “markedly weaker” outlook for economic growth, signaling it may expand stimulus.

U.K. 10-year gilt yields fell to a record after data showed U.K. unemployment rose in the three months through September and joblessness among young people climbed above 1 million for the first time since at least 1992. Growth may be “broadly flat” in the first half of 2012, central bank Governor Mervyn King said in a press conference after the quarterly Inflation Report. “There is no meaningful way to quantify the most extreme outcomes associated with developments in the euro area,” he said.

“Growth outlook remains a major risk to the pound,” said Chris Walker, a currency strategist at UBS AG in London. “The Bank of England’s downward revision of their growth forecast is realistic in our view. They didn’t predict a recession, but if the euro region’s situation deteriorates further, that’s a scenario the market can’t rule out.”

The pound fell 0.3 percent to $1.5775 at 4:16 p.m. London time. Sterling was 0.2 percent weaker at 85.71 pence per euro, after appreciating 0.4 percent to 85.20 pence. It dropped 0.4 percent to 121.44 yen.

The U.K. benchmark 10-year gilts erased earlier gains, leaving yield two basis points higher at 2.17 percent, after dropping to a record 2.11 percent. Two-year note yields were at 0.50 percent.

Asset Purchases

Gilts have returned 15 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, while European benchmark German bunds rose 9.2 percent.

Today’s Inflation Report was the first since the Bank of England announced an extension of its bond-purchase program to 275 billion pounds from 200 billion pounds on Oct. 6, when it said the “deterioration in the outlook has made it more likely” that inflation will undershoot the bank’s 2 percent target in the medium term.

“The prospects for the U.K. have worsened,” the central bank said in its report. Based on its current 275 billion-pound bond program remaining unchanged, inflation may fall below the 2 percent target in two years, signaling that officials may need to increase the stimulus plan.

Unemployment as measured by International Labour Organization standards rose by 129,000 to 2.62 million, the biggest increase since 2009, the Office for National Statistics said in London today. The jobless rate climbed to a 15-year high of 8.3 percent. The number of unemployment-benefit claims rose 5,300 to 1.6 million in October. Economists had forecast an increase of 21,000, according to the median of 24 estimates in a Bloomberg News survey.

The pound has appreciated 1.6 percent in the past month making it the second-best performer after the dollar among 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes.

--With assistance from Jennifer Ryan and Matthew Brown in London. Editors: Matthew Brown, Mark McCord

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