Bloomberg News

U.K. Inflation Gauge Slides to 2012 Low as Service Growth Slows

May 03, 2012

Bond-market measures of U.K. inflation expectations declined as a report showed house prices fell and growth in British services slowed more than economists forecast.

Sterling erased a decline against the euro after the European Central Bank left its benchmark interest rate unchanged at 1 percent. The gauge of services activity dropped to 53.3 in April from 55.3 in March, missing the median forecast of 54.1 in a Bloomberg survey of economists. The 20-year break-even rate, a gauge of inflation expectations derived from the yield difference between nominal and index-linked bonds, fell for a fourth-straight day

“Break-evens have contracted over the past couple of weeks,” said Sam Hill, a gilt strategist at Royal Bank of Canada in London. Shorter-dated break-even rates have fallen less than longer-term indicators, he said. “That reflects some residual concerns about stubbornly high inflation over the rest of 2012.”

Britain’s five-year, five-year forward break-even rate, a market gauge monitored by the Bank of England to forecast inflation expectations starting five years from now, fell two basis points, or 0.02 percentage point, to 2.99 percent as of 5:03 p.m. London time, the lowest close this year.

The U.K.’s 20-year break-even rate fell two basis points to 3.06 percentage points, and reached 3.05 points, matching the least since March 8.

Inflation ‘Too High’

The yield on 10-year gilts was little changed at 2.04 percent after falling to 2.02 percent, the least since April 16. It dropped to a record 1.917 percent on Jan. 18.

Bank of England Governor Mervyn King said yesterday the economy isn’t yet “back to health” and will need the support of low interest rates “for the time being.” King also said inflation is “still too high.” Policy makers will say on May 10 whether they will extend their bond-buying program to aid the recovery after completing the latest round of so-called quantitative easing, the Bank of England said in a statement.

U.K. house prices fell last month as a tax break for first- time buyers ended and the economy entered a double-dip recession, Nationwide Building Society said today. Values slipped 0.2 percent from March, the fourth decline in five months. From a year earlier, prices fell 0.9 percent.

The pound was little changed at $1.6185 after slipping as much as 0.3 percent to $1.6160. Sterling was also little changed at 81.21 pence per euro, after weakening 0.3 percent to 81.43 pence. It appreciated to 81.13 yesterday, the strongest level since June 2010.

Sterling Strength

Sterling has advanced 3.4 percent in the past three months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 0.8 percent and the euro gained 0.7 percent.

Gilts outperformed German bunds today after ECB President Mario Draghi said policy makers did not discuss cutting borrowing costs today as they left the key interest rate unchanged, a decision predicted by all 58 analysts in a Bloomberg survey. Ten-year U.K. bonds yielded 43 basis points more than German debt of the same maturity, compared with 45 basis points on April 30.

Gilts have handed investors a loss of 1.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, the second- worst performer after Greece among 26 sovereign indexes. U.S. Treasuries gained 0.2 percent and German bunds returned 1.6 percent, the indexes show.

The Debt Management Office sold 1.2 billion pounds of inflation-protected bonds due in March 2034. The sale drew bids for 1.93 times the amount of the securities on offer, according to data from the debt agency.

U.K. index-linked bonds lost investors 2 percent this year while their U.S. counterparts returned 2.9 percent, according to data compiled by Bank of America Merrill Lynch.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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