Bloomberg News

Pound Slides as Moody’s Says U.K. Rating at Risk; Gilts Advance

February 15, 2012

Feb. 14 (Bloomberg) -- The pound dropped the most in a month against the dollar after Moody’s Investors Service said the U.K. risks losing its top-grade credit rating should the economy deteriorate.

Sterling weakened versus 12 of its 16 major counterparts after the rating company said late yesterday the change to a “negative outlook” for Britain’s Aaa rated debt was a “weaker macroeconomic environment.” The currency extended losses against the euro after a German report showed investor confidence improved to a 10-month high. Gilts rose.

Moody’s “has given sterling a punch in the ribs,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Compounding that, firmer ZEW confidence figures have kept the downward pressure on the pound against the euro.”

The pound depreciated 0.6 percent to $1.5676 at 4:08 p.m. London time after falling as much as 0.7 percent, the most since Jan. 11. The currency has dropped 1.4 percent in the past week. Sterling declined 0.2 percent to 83.82 pence per euro.

Moody’s said Chancellor of the Exchequer George Osborne needs to stick to the plan to maintain confidence. Even then, the U.K. will be vulnerable to shocks that could blow his plans off course given the limited room for a policy response.

“For me it was a reality check,” Osborne told BBC Radio 4’s “Today” show today. “It’s yet another reminder that Britain doesn’t have an easy way out of its economic problems.”

Pound’s Decline

The pound has declined 1.6 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. Over the past 12 months it has weakened 4.5 percent.

Reports today showed inflation slowed and the property market remained sluggish. The Royal Institution of Chartered Surveyors said its U.K. house-price index was unchanged at minus 16 in January from the previous month, indicating more surveyors saw price declines than gains, it said in a statement today.

The Office for National Statistics said consumer prices rose an annual 3.6 percent in January, the least in 14 months.

The 10-year breakeven rate, a gauge of inflation expectations derived from the difference in yield between regular and index-linked bonds, fell for a third day. The rate dropped three basis points to 2.7 percentage points.

Gilts Gain

The yield on the 10-year gilt dropped four basis points, or 0.04 percentage point, to 2.09 percent. The 3.75 percent bond due in September 2021 gained 0.32, or 3.20 pounds per 1,000- pound face amount, to 114.295. The 30-year yield slid five basis points to 3.27 percent.

“Whatever the situation on the fiscal side and whatever the rating, as long as you have the central bank supporting your debt, the impact remains limited” from Moody’s announcement, said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris.

The central bank announced an additional 50 billion-pound round of bond purchases on Feb. 9 after gross domestic product fell 0.2 percent in the last three months of 2011. The Monetary Policy Committee kept its benchmark interest rate at a record- low 0.5 percent the same day.

The Bank of England will release new economic and inflation forecasts tomorrow. In November, the central bank predicted consumer-price growth would slow to 1.7 percent by year-end, below its 2 percent target.

Gilts have lost 1.7 percent this year, after returning almost 17 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt lost 0.6 percent.

--With assistance from Anchalee Worrachate in London and Lukanyo Mnyanda in Edinburgh. Editors: Mark McCord, Nicholas Reynolds

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


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