Bloomberg News

Pound Rises Versus Dollar as BOE Refrains From Boosting Stimulus

March 07, 2013

The pound rose from a 2 1/2-year low against the dollar as the Bank of England refrained from adding to stimulus efforts that tend to debase the currency after a meeting of policy makers.

U.K. government bonds fell as the central bank’s Monetary Policy Committee said it would keep its so-called quantitative- easing program unchanged at 375 billion pounds ($564 billion). Ten of 39 economists surveyed by Bloomberg predicted increases of between 25 billion pounds and 50 billion pounds. Sterling fell the most in almost two weeks versus the euro as the Bank of England and European Central Bank held interest rates at record lows.

“No change to quantitative easing is a surprise,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London “The pound is higher but it will not last. It’s just a matter of time before further QE hits the economy. I suggest it was a close call on the vote and the next meeting will produce a vote in favor of QE.”

Sterling rose 0.2 percent to $1.5044 at 4:45 p.m. London time after falling to $1.4967, the weakest level since July 2010. The U.K. currency slid for a third day versus the euro, dropping 0.9 percent to 87.07 pence.

Ten-year gilt yields rose six basis points, or 0.06 percentage point, to 2.02 percent. The 1.75 percent security due September 2022 fell 0.53, or 5.30 pounds per 1,000-pound face amount, to 97.71.

Interest Rates

The Bank of England in London kept its main interest rate at 0.5 percent and ECB policy makers meeting in Frankfurt held their benchmark rate at 0.75 percent.

ECB President Mario Draghi said data suggest the 17-nation currency bloc’s economy will stabilize this year. The euro’s exchange rate is in line with long-term averages and is not a policy target, he said.

U.K. 30-year bonds underperformed two-year notes after the Bank of England said it will reinvest proceeds from maturing gilts in its asset-purchase facility evenly across three unchanged bands.

The yield on 30-year bonds rose six basis points to 3.33 percent, while that on two-year notes climbed three basis points to 0.24 percent.

The central bank will buy more bonds with the 6.6 billion pounds associated with a gilt maturing today.

Stimulus Speculation

Sterling has dropped 5.9 percent this year, the second- worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.8 percent and the dollar gained 2.6 percent.

The pound fell earlier amid speculation policy makers would expand stimulus. The Bank of England has forecast “weak” growth in the near term, and while services growth accelerated in February, manufacturing and construction contracted.

Outgoing central bank Governor Mervyn King -- who will be replaced by Canadian Mark Carney in July -- and policy makers Paul Fisher and David Miles were defeated in a push for more stimulus at last month’s meeting of the MPC, minutes of the gathering published on Feb. 20 show.

A U.K. Treasury spokesman said a Financial Times report saying Chancellor of the Exchequer George Osborne is considering giving the central bank more time to bring inflation back to its 2 percent target was no more than a reflection of the public debate. Osborne will consider the Bank of England’s 2 percent inflation target, it said.

“I think Osborne is going to let Carney do an awful lot more on growth and be less restrictive than the current regime that King has to work under,” said Marcus Ashworth, head of fixed income at Espirito Santo Investment Bank in London.

Ashworth spoke in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua and Manus Cranny.

U.K. government bonds have lost 0.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds and Treasuries both fell 0.5 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

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


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