Bloomberg News

Pound Rises as House Prices Climb, Lobby Raises Growth Forecasts

November 01, 2012

The pound strengthened for a third day against the dollar after an industry report showed U.K. house prices increased in October, adding to signs the economy is recovering.

Sterling touched the highest level in two weeks versus the U.S. currency after Britain’s biggest business lobby raised its U.K. economic forecasts and said the Bank of England will probably refrain from expanding stimulus when it meets next week. U.K. government bonds fell for a third day as the Debt Management Office sold 900 million pounds ($1.45 billion) of inflation-linked securities.

“It’s looking like the Bank of England will stay put next week,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “We’re seeing a little sterling strength” and that move may continue, he said.

The pound rose 0.1 percent to $1.6150 at 2:42 p.m. in London after climbing to $1.6175, the strongest since Oct. 17. Sterling was little changed at 80.33 pence per euro after gaining 0.4 percent yesterday.

The U.K. currency will advance to 79 pence per euro by year-end, Kinsella said.

The cost of an average British home increased 0.6 percent from September, when it fell 0.4 percent, Nationwide Building Society said in an e-mailed statement. From a year earlier, prices dropped 0.9 percent, it said.

Higher Forecasts

The U.K. economy will be little changed this year and expand 1.4 percent in 2013, the Confederation of British Industry said in a report published in London. In August, it predicted a 0.3 percent contraction and a 1.3 percent expansion. Growth may accelerate to about 2 percent in 2014, it said.

The pound stayed higher even after a report showed U.K. manufacturing shrank in October. A gauge based on a survey of purchasing managers fell to 47.5 from a revised 48.1 in September, Markit Economics and the Chartered Institute of Purchasing and Supply said. A figure below 50 shows contraction.

The Bank of England’s Monetary Policy Committee next meets on Nov. 7-8. Policy makers voted 9-0 to keep the bond-purchase target at 375 billion pounds at their Oct. 3-4 meeting, according to the minutes released on Oct. 17.

“Whilst there may be no more QE from the BOE next week, it is still on the table, albeit in December or February, depending on the data,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International, referring to the central bank’s asset purchases, known as quantitative easing. “Some of the gains that we may see in sterling could be temporary,” she said on Bloomberg Television’s “The Pulse” with Caroline Hyde.

Impact Undermined

Bank of England Deputy Governor Charles Bean said yesterday that concerns about the economic outlook may undermine the impact of quantitative easing, prompting JPMorgan Chase & Co. to abandon its forecast for the Bank of England to increase stimulus next week.

“Charlie Bean’s speech overnight is enough for us to change the call to expect no addition to QE next week,” London- based JPMorgan economist Malcolm Barr wrote in an e-mailed note to clients today. “But the risks are clearly slanted toward more asset purchases in the early part of next year.”

Barclays Plc, Royal Bank of Scotland Group Plc and Citigroup Inc. have also abandoned previous forecasts for more quantitative easing at this month’s Bank of England meeting.

The pound strengthened 0.2 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 0.8 percent and the dollar rose 0.1 percent.

The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 1.88 percent after climbing to 1.90 percent, the highest level since Oct. 26. The 1.75 percent bond due in September 2022 fell 0.245, or 2.45 pounds per 1,000-pound face amount, to 98.84.

The government sold inflation-linked gilts maturing in November 2047 at a so-called real yield of 0.294 percent. Investors bid for 1.75 times the amount of bonds allotted, according to the DMO website.

Gilts returned 2.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.3 percent and U.S. Treasuries earned 2.1 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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