Pound Declines Versus Euro, Dollar as ‘Lackluster’ Economy Curbs Rate Bets

The pound weakened after data showed economic growth in Germany and France exceeded estimates and a report said U.K. living standards will fall, spurring bets that euro-region interest rates will outpace increases in Britain.

Sterling depreciated versus the majority of its 16 most traded peers. German gross domestic product jumped 1.5 percent in the first quarter compared with the previous three months, and French GDP rose 1 percent, exceeding economists’ median estimates of 0.9 percent and 0.6 percent respectively. U.K. living standards will decline as inflation outstrips income growth and government spending cuts crimp welfare payments, the Institute for Fiscal Studies said.

“The U.K. economy looks pretty lackluster compared to the likes of Germany and France, which supports the view that rates are going to rise faster in the euro zone,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “That’s going to keep the pound among the laggards of the currency world.”

The pound was 0.2 percent weaker at 87.64 pence per euro as of 4:01 p.m. in London. The British currency fell 0.6 percent against the dollar to $1.6200S, a fourth day of declines. Sterling bought 130.96 yen from 131.86 yen yesterday.

U.K. government bonds were mixed, with the yield on the 10- year gilt little changed at 3.37 percent and the two-year yield slipping two basis points to 1 percent.

Rate Outlook

The Bank of England left its main interest rate at a record low of 0.5 percent on May 5. European Central Bank President Jean-Claude Trichet signaled on the same day that policy makers may raise borrowing costs after June, following a decision to keep their main rate at 1.25 percent.

Money markets have pushed back expectations for a 25 basis- point increase in the U.K’s benchmark rate to January, Tullett Prebon Plc sterling overnight interbank average forwards data show. As recently as March, traders were betting on a quarter point increase by this month.

“There might not be a double-dip recession, but the U.K. economy is certainly facing a period of stagnation,” said Jones. “That’s not going to be helped by raising interest rates. The small size of the anticipated rate increase won’t do much to inflation, which is mainly imported, so it would be better to just keep rates on hold.”

The Confederation of British Industry lowered its economic growth estimates for the U.K. on May 9, saying gross domestic product would expand 1.7 percent this year compared with a February estimate of 1.8 percent.

Spending Cuts

The U.K. economic outlook may worsen further as Prime Minister David Cameron’s coalition government battles a fiscal deficit running at almost 10 percent of gross domestic product by raising taxes and implementing public spending cuts that the IFS says are the deepest since World War II.

The central bank said this week that inflation may reach 5 percent later this year, more than double its 2 percent target, even while risks to economic growth remain “skewed to the downside.” Inflation expectedly slowed to 4 percent in March from a year earlier, up from 4.4 percent the previous month, the U.K. office for National Statistics said April 12.

U.K. consumer earnings fell 3.8 percent in real terms in the 11 months through February after growing through the recession of the previous two years, the London-based IFS said in its report on living standards published today.

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

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

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