U.K. Pound Advances Against Euro as BOE Keeps Rates Unchanged

The pound rose against the euro as the Bank of England kept its main interest rate at a record low and Portugal’s request for financial assistance dented demand for the 17-nation currency.

Sterling fell against the dollar for the first day in five, staying within a cent of a two-week high. The decision to leave the U.K. key rate at 0.5 percent was predicted by all 57 economists surveyed by Bloomberg News. The European Central Bank increased its main rate by 25 basis points today, as predicted by economists in a Bloomberg survey. Portugal’s Prime Minister Jose Socrates said late yesterday that the nation had no choice but to seek financial aid.

“The pound’s direction from here will be data dependent,” said Marcus Hettinger, a foreign-exchange strategist at Credit Suisse Group AG in Zurich. “It’s clear the Bank of England will raise rates. It’s a matter of timing.”

The British currency strengthened 0.2 percent to 87.59 pence per euro as of 4:36 p.m. in London, posting its third gain of the past four days. Sterling was 0.2 percent weaker at $1.6307, after climbing yesterday to $1.6302, the strongest level since March 23.

Sterling has strengthened 0.8 percent against the euro in the past five days as reports added to evidence the economy is recovering from a fourth-quarter contraction, stoking speculation the Bank of England will also start raising interest rates this year. At 4.4 percent in February, the U.K. inflation rate is more than twice the bank’s 2 percent target.

House Prices

U.K. home prices rose 0.1 percent in March, after dropping 0.9 percent in the prior month, Lloyds Banking Group Plc’s Halifax unit said yesterday. Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said a day earlier that service industries expanded at a faster pace in March.

Investors priced in a 25 basis-point rise in the central bank rate by July, according to forward rates on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc. They have priced in a second increase by November.

“Sterling should do okay from here” depending on economic data, said Adam Cole, global head of foreign-exchange strategy at Royal Bank of Canada in London.

The 10-year gilt yield was two basis points lower at 3.75 percent, after increasing earlier to 3.80 percent, the most since Feb. 21. The two-year yield fell three basis points to 1.37 percent.

Inflation Expectations

“The Bank continues to believe that much of the recent rise in the level of the consumer price index is due to external factors and is not domestically generated,” John McNeill, Edinburgh-based head of international rates at Aegon Asset Management, said in an e-mailed statement.

Investors increased their inflation expectations for a seventh day, bond trading showed.

The 10-year breakeven rate, derived from the difference between nominal and index-linked bonds, increased one basis point to 3.30 percentage points. The rate, a gauge of expectations for consumer prices over the life of the securities, has climbed from a 2011 low of 3.06 percentage points on Jan. 4.

Gilts have lost 0.4 percent since the end of March, extending their decline this year to 1.2 percent, according to indexes developed by Bank of America Merrill Lynch. German securities have lost 2.6 percent since Dec. 31 while Treasuries dropped 0.5 percent, according to the indexes.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE