Pound Climbs as BOE Keeps Bond Buys Unchanged, House Prices Rise

The pound climbed above $1.62 for the first time since January after the Bank of England kept its bond-purchase program unchanged and held its benchmark interest rate at a record low of 0.5 percent.

Sterling appreciated against 15 of its 16 most active peers as a report showed that house prices rose by more than economists had estimated. All but two of 38 economists in a Bloomberg survey predicted central bank Governor Mervyn King would keep the quantitative-easing program unchanged today. Thirty-year gilts underperformed two- and 10-year bonds after the U.S. Federal Reserve resumed its asset-purchase program yesterday, targeting medium-maturity Treasuries.

“The Bank of England is obviously taking a wait-and-see stance, given the way things are with the local and global economies,” said Geoffrey Yu, a currency strategist at UBS AG in London. “There is still downside risk to growth, but on the other hand things are probably much better than previously expected in their view.”

Sterling jumped 1.1 percent to $1.6250 as of 4:53 p.m. in London, after climbing to $1.6299, the strongest level since Jan. 21. It appreciated 0.5 percent to 87.48 pence per euro.

U.K. house prices climbed in October, erasing half of the record drop posted the previous month, according to Halifax, a unit of Lloyds Banking Group Plc. The average cost of a home increased 1.8 percent from September, the mortgage-lender said in a statement today.

The currency has gained 2.5 percent against the dollar and 1.6 percent against the yen since the Oct. 26 release of data showing the economy grew faster in the third quarter than economists had forecast. That prompted some investors to trim bets the central bank will expand quantitative easing today.

Gilts Underperform

The pound may climb to its strongest level this year against the dollar should it end this week above $1.6320, according to Ashraf Laidi, chief market strategist at CMC Markets in London. The currency rose to $1.6458 on Jan. 19, according to Bloomberg data.

The Fed said yesterday it will buy an additional $600 billion of Treasuries through June in a bid to reduce unemployment and boost consumer-price growth.

The yield on 30-year gilts was little changed at 4.08 percent after rising as much as 8 basis points to 4.17 percent earlier. Ten-year note yields declined five basis points to 2.94 percent. The yield difference between the two securities widened to 113 basis points, the most since Oct. 22.

Chancellor of the Exchequer George Osborne said today the government’s plan to cut the U.K.’s budget deficit will give the central bank more flexibility in its monetary policy.

‘Wide of the Mark’

Investors haven’t ruled out the prospect of further bond purchases by the bank.

“We think expectations of extended QE in the U.K. are wide of the mark,” said Steven Mansell, a fixed-income strategist at Citigroup Inc. in London. “However, we think the shape of the U.K. yield curve still reflects some anticipation of future quantitative easing.”

Gilts underperformed U.S. Treasuries today, widening the yield difference between the 10-year securities by three basis points to 45 basis points. U.K. government debt handed investors 9.1 percent this year, compared with 8.70 percent from German bonds and 8.9 percent from Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Inflation expectations have increased as investors raised bets that the economic recovery will be strong enough to fuel price growth. The 10-year breakeven rate, a gauge of market expectation of inflation derived from the yield difference between nominal and index-linked bonds, rose two basis points to 2.82 percentage points, compared with 2.69 percentage points at the end of September.

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