The pound fell to the lowest level in two weeks against the euro after the Bank of England said the U.K. economy may contract this quarter, fueling speculation it will need to add further stimulus to boost growth.
Sterling erased a gain versus the dollar as the central bank warned there was a “greater risk that the U.K. economy may be in a period of persistent low growth.” The Monetary Policy Committee halted expansion of its asset-purchase target, or quantitative easing, last week after some officials raised doubts about the effectiveness of the program. Gilts dropped, pushing 10-year yields up by the most in three weeks.
“The projections and comments from the Bank of England suggested the central bank hasn’t concluded the quantitative- easing program,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The possibility of further QE has put the pound under pressure.”
The U.K. currency slipped 0.4 percent to 80.39 pence per euro at 5:03 p.m. London time, after reaching 80.45 pence, the weakest since Oct. 31. Sterling slid 0.2 percent to $1.5847 after rising as much as 0.2 percent to $1.5901.
Sterling has gained 1.1 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 2.9 percent and the dollar dropped 1.1 percent.
Bank of England policy makers maintained their bond-buying target at 375 billion pounds and kept the main interest rate at a record-low 0.5 percent on Nov. 8. While the central bank cut its growth outlook today, it raised its inflation projection.
“We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while,” Governor Mervyn King told reporters in London today. “The committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”
Gilts extended their decline as the upward revision in inflation was taken by some analysts to mean the scope for further bond purchases may be limited.
“The inflation profile has been revised up at the same time the growth profile has deteriorated,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “This suggests the BOE sees less spare capacity in the economy and that weak potential output growth is a barrier for further stimulus.”
The benchmark 10-year gilt yield rose four basis points, or 0.04 percentage point, to 1.75 percent, after climbing as much as eight basis points, the most since Oct. 25. The 1.75 percent bond maturing in September 2022 dropped 0.37, or 3.70 pounds per 1,000-pound face amount, to 99.99.
The yield on 30-year gilts climbed four basis points to 3.08 percent before the Debt Management Office sells 2 billion pounds of bonds maturing in 2052 tomorrow.
The 10-year break-even rate, the difference between yields on gilts and index-linked securities used as a market gauge of inflation expectations, increased four basis points to 2.58 percentage points, the most since Oct. 26.
Gilts returned 3.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.1 percent and U.S. Treasuries rose 2.8 percent.
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