Pound Forecasts Boosted to Highest Since 2011 on BOE Rate Bets

Analysts have increased their year-end forecasts for the pound against the dollar to the highest in more than two years amid speculation the Bank of England will increase interest rates before the Federal Reserve.

The U.K. currency is forecast to trade at $1.62 by Dec. 31, according to a Bloomberg News survey. While that’s a 2.6 percent decline from the current level, it’s the highest projection for the end of 2014 since November 2011. Sterling was little changed versus the dollar and euro today. U.K. government bonds snapped a five-day decline after Bank of England Governor Mark Carney ruled out selling the central bank’s entire gilt holdings.

“We continue to see economic growth remain strong in the U.K. this year even if it slows modestly later this year,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said yesterday. “Declining spare capacity in the U.K. economy may prompt the BOE to become the first major central bank to begin raising rates, in the first quarter of 2015, proving increasing support for the pound.”

Sterling dropped 0.1 percent to $1.6632 at 4:43 p.m. London time after rising to $1.6786 on March 7, the strongest level since Feb. 17. The U.K. currency was at 83.36 pence per euro after weakening 1.5 percent in the previous three days.

The pound has gained 13 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 6.7 percent, while the dollar weakened 0.3 percent.

Improving Economy

Sterling has rallied amid speculation an improving economy will prompt Carney to increase borrowing costs sooner than policy makers anticipate.

Reports from gross domestic product to construction in the past year have added to signs the economy is gathering momentum. Data today showed both industrial production and manufacturing expanded in January. The Bank of England has kept its benchmark interest rate at a record-low 0.5 percent since March 2009.

Citigroup Inc.’s Economic Surprise Index for the U.K. climbed last week to the highest relative to its U.S. equivalent since September. The index, which shows if data beat or fell short of economists’ forecasts, was at 24.50 from this year’s low of minus 9.3 on Jan. 16.

The equivalent U.S. gauge is at minus 33.60, leaving the U.K.’s measure at 58.1 higher. The spread expanded to 60.5 on March 7, the widest since Sept. 4.

Spring Increase

Bank of Tokyo-Mitsubishi forecasts the pound will trade at $1.70 by the end of the year, the joint-second most bullish in Bloomberg’s survey of 59 estimates.

Bank of England policy maker Martin Weale said last month the first interest-rate increase will “come perhaps in the spring of next year.”

The 10-year gilt yield dropped two basis points, or 0.02 percentage point, to 2.78 percent after increasing 15 basis points during the previous five days. The 2.25 percent bond due in September 2023 rose 0.135, or 1.35 pounds per 1,000-pound face amount, to 95.61.

The Debt Management Office sold 3 billion pounds of 2.75 percent bonds due in September 2024 today at an average yield of 2.928 percent, up from 2.73 percent at the previous auction of 10-year gilts on Feb. 20.

Policy makers said last week they would reinvest 8.1 billion pounds of funds related to their 375-billion pound asset purchase program. The cash flow is associated with a gilt that matured on March 7, the Bank of England said.

Carney said today in testimony to the Treasury Committee that the central bank would not sell its entire holding of gilts and any disposals should only begin after interest rates have been raised “several” times.

Gilts returned 1.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. U.S. Treasuries gained 1.4 percent, while German securities rose 2.2 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Nicholas Reynolds, Mark McCord

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