Bloomberg News

Pound Declines for Second Week as Minutes Signal More Stimulus

November 26, 2011

Nov. 26 (Bloomberg) -- The pound declined for a second week against the dollar as minutes of the Bank of England’s most recent meeting showed some policy makers said an increase in stimulus may be needed to support the economic recovery.

Sterling fell to a seven-week low versus the U.S. currency as the minutes revealed the nine-member Monetary Policy Committee, led by Governor Mervyn King, voted unanimously to keep its key interest rate at a record low 0.5 percent and hold its target for quantitative easing at 275 billion pounds ($427 billion). The pound fell for a third week against the yen. Ten- and 30-year gilt yields dropped to record lows.

“More quantitative easing should weaken sterling, but other factors, such as general risk sentiment, can dominate,” said John Hydeskov, chief analyst at Danske Bank A/S in London. “It’s natural for the BOE to apply more stimulus. We expect the Bank of England to increase its asset-purchase target by 50 billion pounds in January 2012.”

The pound dropped 2.1 percent this week to $1.5475 at 4:51 p.m. London time yesterday, the biggest decline since the five days ended Sept. 23. The currency slid to $1.5423, the weakest since Oct. 6. Sterling fell 1.1 percent over the week to 120.21 yen, and was little changed at 85.65 pence per euro.

“The balance of risks to inflation” in the central bank’s new forecasts “meant that a further expansion of the asset- purchase program might well become warranted in due course,” according to the minutes released Nov. 23 in London.

The Bank of England said the threat from the euro-area debt crisis had increased. Officials predicted inflation may slow below their 2 percent target in two years, signaling they may need to increase the stimulus plan.

Merkel Opposed

German Chancellor Angela Merkel said Nov. 24 she remained opposed to joint euro bonds, damping optimism the policy would help resolve the region’s sovereign-debt crisis.

“The foreign-exchange market is failing to produce many alternative safe-haven currencies” to the dollar, said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “It’s likely that sterling will outperform the euro near-term, even though cable is likely to see further downside pressure,” she said, referring to the pound-dollar exchange rate.

The pound has declined 3.1 percent in the past year, the third-worst performer after the Canadian and New Zealand dollars among 10 developed-market peers measured by Bloomberg Correlation-Weighted Indexes.

‘Well Behind’

Britain is “well behind” where it needs to be on economic growth, Prime Minister David Cameron told the Confederation of British Industry annual conference on Nov. 21. The government is working on a “massive” credit-easing plan, he said.

Chancellor of the Exchequer George Osborne will use his statement to Parliament on Nov. 29 to set out full details of the program to aid companies finding it hard to obtain bank finance, Cameron said.

The 10-year gilt yield rose four basis points this week to 2.29 percent, after declining to 2.104 percent on Nov. 23, the lowest since Bloomberg began collecting data on the securities in 1992. The 30-year rate dropped to an all-time low 3.054 percent on Nov. 24 before ending the week at 3.14 percent.

Gilts returned 16 percent this year through Nov. 24, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt gained 6.9 percent and U.S. Treasuries rose 9.8 percent.

--Editors: Nicholas Reynolds, Mark McCord

To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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


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