Pound Drops as Inflation Data Damps BOE Rate Speculation

The pound fell for the first time in five days against the dollar after U.K. inflation dropped to its lowest rate in 4 1/2 years in May, damping speculation the Bank of England will raise interest rates sooner than forecast.

Sterling weakened against most of its 16 major peers. The yield on two-year U.K. government bonds earlier reached the highest since 2011 after policy maker David Miles hinted that minutes of its June 5 meeting will show the central bank is moving closer to raising interest rates, according to the London-based Times newspaper. Governor Mark Carney said on June 12 that borrowing costs may rise sooner than economists expect.

“The market has been fixated on the shift in tone from governor Carney and some comments from the usually dovish Miles overnight,” said Daragh Maher, currency strategist at HSBC Holdings Plc in London. “But the inflation data has surprised on the downside this morning suggesting the BOE has a little bit more room to wait before hiking. The pound is understandably lower as a result.”

Sterling slid less than 0.1 percent to $1.6975 at 11:10 a.m. London time after rising to $1.7011 yesterday, the highest since Aug. 6, 2009. The pound was little changed at 79.91 pence per euro after yesterday appreciating to 79.59 pence, the strongest level since Oct. 1, 2012.

The pound strengthened 8.9 percent in the past year, the best performer after the New Zealand dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 1.7 percent and the dollar was little changed.

Inflation Slows

Consumer prices rose 1.5 percent in May, the least since October 2009, the Office for National Statistics said. That compared with a median forecast of 1.7 percent in a Bloomberg News survey of analysts. Inflation has been at or below the central bank’s 2 percent target for six months, the longest stretch since 2009.

Two-year gilts pared their drop after the data, with the yield rising one basis point, or 0.01 percentage point, to 0.91 percent after touching 0.93 percent, the highest level since June 2011. The 2 percent gilt due in January 2016 fell 0.015, or 15 pence per 1,000-pound face amount, to 101.725. The 10-year yield was little changed at 2.75 percent.

Shorter-maturity debt tends to track what the Bank of England does with its benchmark rate, while longer-term securities are more influenced by the outlook for inflation.

Rate Increase

Miles, an external member of the U.K. central bank’s Monetary Policy Committee, said he was more confident about prospects to the stage where he now thinks he will vote for a rate increase before he steps down in May, according to the Times newspaper, citing an interview. Minutes of the June policy meeting will be published tomorrow.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will increase 25 basis points by January, versus May before Carney’s speech last week. The Bank of England’s main interest rate has been at a record-low 0.5 percent since March 2009.

Gilts returned 2.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 2.8 percent and German securities gained 4.2 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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

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