Pound Advances as U.K. Rate Cut Speculation Subsides

The pound advanced for the first time in three weeks against the euro after Bank of England Governor Mervyn King said cutting U.K. interest rates may be counterproductive.

Sterling reached the highest this month against the dollar after King’s comments damped speculation policy makers will reduce borrowing costs to spur growth. Ten-year gilts snapped two weeks of declines amid bets the Monetary Policy Committee will expand a bond-buying program to aid the recovery after the London-based central bank cut its growth forecasts for this year and next in its quarterly Inflation Report.

“The market had priced in a rate cut as early as September,” said Sara Yates, a foreign-exchange strategist at Barclays Plc in London, said by phone. “King dismissed this and that’s supported sterling. He highlighted the difficulty of cutting rates in the short term and showed he is a very strong advocate of bond buying.”

The pound gained 1.1 percent over the week to 78.36 pence per euro at 4:30 p.m. London time yesterday, when it appreciated to 78.28 pence, the strongest since Aug. 2. The U.K. currency climbed 0.3 percent to $1.5679, and reached $1.5701, the most since July 31.

Policy makers have discussed a rate cut and “we concluded, for the time being, that it would be more counterproductive than beneficial,” King told reporters at a press conference in London on Aug. 8. Asset purchases remain the central bank’s main stimulus instrument, he said.

BOE Forecast

The 10-year gilt yield ended the week down two basis points, or 0.02 percentage point, at 1.54 percent. The 4 percent bond maturing in March 2022 gained 0.18, or 1.80 pounds per 1,000-pound face amount, to 121.825.

The Bank of England forecast annual gross domestic product growth of about 2 percent in two years, compared with a projection in May of 2.5 percent.

U.K. inflation slowed in July to 2.3 percent, the least in more than 2 1/2 years, according to the median forecast of 35 economists surveyed by Bloomberg News before a report released on Aug. 14. A day later, the U.K. central bank will release the minutes of this month’s meeting, showing how officials voted when they kept their asset-purchase target on hold at 375 billion pounds.

Sterling has advanced 1.9 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 2.4 percent and the yen gained 1.5 percent.

Gilts have returned 3.4 percent this year through Aug. 9, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 3.2 percent and U.S. Treasuries rose 1.9 percent.

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