Pound Weakens as Central Bank Expands Bond Buying; Gilts Gain
February 11, 2012, 2:22 AM ESTBy Emma Charlton
Feb. 11 (Bloomberg) -- The pound declined against the dollar and euro this week as the Bank of England boosted its bond-purchase program amid signs U.K. growth is stalling.
Gilts completed a weekly gain after the central bank said it will pump another 50 billion pounds ($79.1 billion) into the economy as the growth outlook remains “weak.” Gross domestic product probably shrank 0.2 percent this quarter, according to the National Institute of Economic and Social Research, whose clients include the Bank of England and the Treasury.
“The quantitative easing is a negative force on the pound,” said Gavin Friend, a markets strategist at National Australia Bank Ltd. in London. “We are not positive on the outlook. The pound should underperform.”
The U.K. currency declined 0.4 percent this week to $1.5752 as of 4:44 p.m. London time yesterday, after rising 3.2 percent over the previous three weeks. Sterling dropped 0.6 percent to 83.71 pence per euro after falling to 84.07 pence yesterday, the weakest since Jan. 30.
Britain’s currency has depreciated 1.2 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The pound has declined 4.2 percent in the past 12 months.
The Monetary Policy Committee raised the target for bond purchases to 325 billion pounds on Feb. 9, more than a quarter of current outstanding gilts, according to a statement in London. The Committee also held its benchmark interest rate at a record-low 0.5 percent.
Yields Fall
The yield on the 10-year gilt fell five basis points this week to 2.13 percent. The 3.75 percent bond maturing in September 2021 gained 0.44, or 4.40 pounds per 1,000-pound face amount, to 113.965.
Gilts may extend their advance next week before a government report that economists said will show inflation slowed in January. Price gains eased to 3.6 percent from 4.2 percent in December, according to a Bloomberg survey before the Office for National Statistics data on Feb. 14. The BOE will release new economic and inflation forecasts the following day.
Gilts have handed investors a 2.3 percent loss this year, while German government bonds have slipped 1.1 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
The U.K. is scheduled to auction 1.75 billion pounds of 2034 bonds on Jan. 16.
--With assistance from David Goodman in London. Editors: Nicholas Reynolds, Mark McCord
To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
