Pound Climbs as BOE Signals Rates May Rise Sooner Than Planned

The pound advanced for a second week against the dollar after the Bank of England signaled officials may increase interest rates sooner than previously forecast as the economy improves.

Sterling climbed to the highest level versus the yen in more than four years after Governor Mark Carney said on Nov. 13 that Britain has “one of the strongest recoveries in the advanced world” and as the central bank increased its growth forecasts. Policy makers will publish minutes of their November policy meeting next week. U.K. government bonds widened the yield gap with German bunds to the most since 2005.

“The pound has rallied well to finish the week on the up after a hawkish Bank of England inflation report,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. Sterling “can continue to drift higher” versus the dollar, he said.

Sterling strengthened 0.6 percent to $1.6105 at 5:03 p.m. London time yesterday, matching the previous week’s gain. Britain’s currency fell 0.3 percent to 83.71 pence per euro and appreciated 1.7 percent to 161.34 yen. The U.K. currency rose to 161.65 yen yesterday, the most since August 2009.

The jobless rate is more likely than not to reach the 7 percent threshold at which the central bank might start thinking about increasing borrowing costs from a record-low 0.5 percent, in the third quarter of 2015, the Bank of England said in its quarterly Inflation Report on Nov. 13. It previously forecast that would happen in the second quarter of 2016.

BOE Minutes

The central bank will publish the minutes of its Nov. 7 policy meeting on Nov. 20. At that gathering, the central bank kept its key rate at a record low 0.5 percent and maintained its bond-buying stimulus target at 375 billion pounds.

The pound gained 3.1 percent in the past three months, the best performer after the New Zealand dollar among 10 developed-market counterparts tracked by Bloomberg Correlation-Weighted Indexes. The euro climbed 0.9 percent, while the yen dropped 3.3 percent and the dollar gained 0.2 percent.

The yield on 10-year gilt fell two basis points, or 0.02 percentage point, to 2.75 percent. The 2.25 percent security maturing in September 2023 rose 0.175 in the week, or 1.75 pounds per 1,0000-pound face amount, to 95.755.

The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds widened to 1.07 percentage points on Nov. 13, the most since 2005, according to closing-price data compiled by Bloomberg.

The U.K. plans to sell 3.75 billion pounds of 2.25 percent gilts maturing in 2023 on Nov. 19 and 4.75 billion pounds of securities due in 2019 on Nov. 21.

Gilts lost 3 percent this year through Nov. 14, according to Bloomberg World Bond Indexes. German bonds dropped 1.1 percent and U.S. Treasuries declined 2.3 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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

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