Bloomberg News

Pound Weakens Versus Dollar as Inflation Slows; Gilts Decline

May 22, 2012

The pound fell for the first time in three days against the dollar after a government report showed U.K. inflation slowed last month more than economists forecast.

Sterling weakened against most of its 16 major counterparts as the International Monetary Fund said the Bank of England should resume monetary stimulus, or quantitative easing, to help the flagging economy. The pound has strengthened 4.8 percent in the past three months, the best performer of the 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Gilts declined.

“It looks like a line hasn’t been drawn under QE and today’s inflation figures will slow down sterling’s recent surge,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “After the pound’s recent good run the market has found itself a bit long and was looking for an excuse to sell.” A long position is a bet an asset will rise.

The pound depreciated 0.2 percent to $1.5789 at 4:28 p.m. London time after falling to $1.5733 on May 18, the lowest level since March 16. The U.K. currency gained 0.2 percent to 80.75 pence per euro.

U.K. consumer prices rose 3 percent in April from a year earlier, after increasing 3.5 percent in March, the Office for National Statistics said in London. Economists surveyed by Bloomberg News forecast a gain of 3.1 percent.

Easing Recommended

The Bank of England needs to inject more stimulus into the economy through more bond purchases or by cutting interest rates as “large” risks from the euro-area crisis may derail growth and inflationary pressures remain weak, the IMF said in its annual review of the U.K. published today..

Bank of England policy makers halted their bond-purchase program at 325 billion pounds this month. Minutes of the most recent monetary policy meeting held on May 9-10 will be published tomorrow.

U.K. government bonds declined for a second day after Germany’s Finance Minister Wolfgang Schaeuble said he will consider all ideas to bolster euro-area growth, damping demand for haven assets.

The 10-year yield climbed three basis points, or 0.03 percentage point, to 1.88 percent after reaching 1.90 percent, the highest level since May 16. The 4 percent bond maturing in March 2022 dropped 0.31, or 3.10 pounds per 1,000-pound face amount, to 118.92.

Gilts have returned 1.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries gained 1.3 percent, and German bunds rose 3 percent.

Britain had an underlying budget deficit of 13.8 billion pounds in April, the first month of the fiscal year, the Office for National Statistics said.

The figure, which excludes support for banks, compared with 9.1 billion pounds a year earlier. Revenue rose 1.3 percent in April from a year earlier and spending increased 3.8 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net;

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


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