Pound Falls on `Uneven' Recovery as Bank of England Holds Interest Rates
Sept. 9 (Bloomberg) -- Bill Hubard, chief economist at MIG Bank SA, talks about Norway's strategy to buy bonds of Greece, Italy, Portugal and Spain. He speaks with Andrea Catherwood on Bloomberg Television's "The Pulse." (Source: Bloomberg)
The pound weakened against the euro as U.K. Deputy Prime Minister Nick Clegg said the nation’s recovery will probably be “uneven” and the Bank of England kept interest rates at a record low.
Sterling fell against 14 of its 16 most-traded peers amid speculation the central bank will plan further measures designed to stimulate the economy as the government cuts its record budget deficit. The central bank kept its key rate at 0.50 percent and held quantitative-easing asset purchases at 200 billion pounds ($310 billion), matching unanimous estimates in Bloomberg surveys of economists. The Bank of England releases minutes explaining its decision on Sept. 22.
“It will be interesting to see if there’s been any increase in debate about a second round of quantitative easing,” said Simon Derrick, chief foreign-exchange strategist at Bank of New York Mellon Corp. in London. “I remain profoundly cautious about the U.K. economy, and we’re going to see moderate but steady weakening of the pound.”
The pound weakened 0.1 percent to 82.33 pence per euro at 3:56 p.m. in London. It was little changed at $1.5471, after falling as much as 0.6 percent.
Sterling has declined 3.1 percent in the past month against the dollar as speculation mounts that the austerity drive will crimp growth in the second half. Chancellor of the Exchequer George Osborne will detail 61 billion pounds of spending reductions on Oct. 20. The scale of the measures prompted Bank of England Governor Mervyn King to trim his quarterly growth estimates on Aug. 11 and say inflation will probably slow below the bank’s 2 percent target in 2012.
‘Building Blocks’
“We’re putting in place the building blocks so we have a rebalanced and more stable economy in the years to come,” Clegg said today in an interview on BBC Radio. “This recovery that is starting is likely to be choppy and uneven.”
Data showed Britain’s trade deficit widened to a record in July. The U.K. goods-trade gap widened to 8.7 billion pounds in July from 7.5 billion pounds the previous month, the Office for National Statistics said today. The median of 13 forecasts in a Bloomberg News survey was for a 7.5 billion-pound deficit. Exports fell 0.9 percent and imports rose 3.1 percent.
While the jump in imports may signal strength in domestic demand, weakening exports suggest the economy is failing to benefit from the weakness of the pound, which has dropped 2.6 percent against developed-world counterparts this year, according to Bloomberg Correlation-Weighted Currency Indexes.
“The trade numbers suggest a more competitively-priced sterling may be no bad thing,” Derrick said.
OECD Report
The global economic recovery is proving slower than projected and policy makers may need to extend or bolster stimulus programs, the Organization for Economic Cooperation and Development said today.
If the slowdown is temporary, then policy makers should postpone the withdrawal of monetary support for a few months, while maintaining plans to reduce fiscal deficits, the OECD said. If growth is threatened for longer, then central banks may need to buy assets through so-called quantitative easing and commit to near-zero interest rates for a long period while governments delay cutbacks, it said.
The U.K.’s cuts are “likely to make the Bank of England consider resuming quantitative easing if growth is adversely affected,” Mansoor Mohi-Uddin, global head of currency strategy at UBS AG in Singapore, wrote in an e-mailed note today. “As a result we expect sterling to weaken.” The bank forecasts the pound will reach $1.35 by the end of 2010.
U.K. government bonds dropped as demand for the safest assets ebbed. Stocks rose, while an Irish bill sale eased concern that Europe’s sovereign-debt crisis is spreading. Ireland’s auction was “reasonable and better than expected,” according to Dublin-based brokerage Glas Securities.
Opposition to Osborne
The 10-year U.K. gilt yield climbed 6 basis points to 3.05 percent, the highest since Aug. 19. The two-year note yield was 2 basis points higher at 0.68 percent.
Investors should consider ending bets that gilts will extend this year’s gains, given the possibility that political opposition may derail some of Osborne’s budget cuts, Royal Bank of Canada said.
“To the extent the profile of any opposition that manifests itself is effective, those investors who have been exposed to the gains on offer in the gilt market in 2010 could quickly decide it makes good sense to book profit,” Sam Hill, a fixed-income strategist at RBC in London, said in a research report dated yesterday.
The U.K. 10-year breakeven rate, the difference between the yield on 10-year gilts and equivalent-maturity inflation-linked bonds, rose 4 basis points to 273 basis points, the highest level since July 16.
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net
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