The pound posted its biggest weekly gain versus the euro this year as the European Central Bank loaned a record amount of cash to the region’s banks, increasing the supply of the 17-nation currency.
Sterling was also boosted as Bank of England Monetary Policy Committee member Martin Weale said inflation was likely to persist in the U.K., reducing the need for further asset purchases. The ECB loaned 529.5 billion euros ($699 billion) to the region’s banks on Feb. 29 in the second of its longer-term refinancing operations.
“The pound is looking firmer against the euro and there seems little doubt that the LTRO has had a mildly negative impact against the single currency,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Weale’s comments moved additional U.K. quantitative easing further away at the same time as Europe is effectively doing more.”
The pound strengthened 1.7 percent this week to 83.27 pence per euro as of 5:03 p.m. in London yesterday, the biggest advance since the period ended Dec. 16. The currency jumped 1.1 percent on Feb. 29, the day the LTRO was announced. Sterling fell 0.2 percent to $1.5849.
This week’s refinancing operation meant the ECB has now offered more than 1 trillion euros in three-year loans to the region’s banks to contain the sovereign debt crisis.
Higher oil prices and potential wage pressures “suggest a risk that there may be more persistence to inflation than one might expect at a time of rising unemployment,” Weale said in a speech in London on Feb. 29. “I do not think there is likely to be a further case once our current program is complete” in early May for more bond purchases.
The yield on the benchmark 10-year gilt increased seven basis points over the week to 2.14 percent. The 4 percent bond due March 2022, which became the benchmark on Feb. 29, closed the week at a price of 116.695.
Gilts have handed investors a loss of 1.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds, Europe’s benchmark securities, have dropped 0.1 percent.
The Bank of England’s Monetary Policy Committee will keep its bond-buying target at 325 billion pounds when it next meets on March 8, according to all the 45 economists in a Bloomberg News survey.
The U.K. will sell as much as 1 billion pounds of inflation-linked bonds maturing in 2034 on March 6. It will auction up to 4 billion pounds of 1 percent bonds maturing in September 2017 the following day.