The pound fell against the euro, paring last week’s advance, after Bank of England Governor Mervyn King said the euro-area debt crisis is still impeding Britain’s economy.
Sterling declined the most in a week against Europe’s shared currency before a report tomorrow that economists said will show U.K. inflation in July slowed to the least in 2 1/2 years. Government bonds slid after policy maker Adam Posen said officials should go beyond buying the securities and consider purchasing private assets to fight the recession. The London-based central bank is due to publish the minutes of this month’s policy meeting in two days.
“King’s comments have given the pound a reality check, he’s saying there is not going to be a quick fix for the economy,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “There’s a stream of bad words at the moment. That should weigh on the pound.”
Sterling declined 0.4 percent to 78.64 pence per euro at 4:37 p.m. London time, after weakening as much as 0.5 percent, the most since Aug. 6. It was little changed at $1.5692, after advancing 0.3 percent against the U.S. currency last week. Sterling climbed 1.1 percent against the euro in the five days to Aug. 10.
“If the rest of the world were growing normally, the rebalancing and recovery of our economy would be much easier,” King wrote in an article published yesterday in the Mail on Sunday newspaper. “But it isn’t. Even the rapidly expanding emerging-market economies are slowing, and the problems of the euro area continue with no obvious end in sight.”
The central bank, which left its bond-purchase, or quantitative easing, target at 375 billion pounds on Aug. 2, last week said the outlook is “unusually uncertain.” It predicted annual gross domestic product expansion of about 2 percent in two years, compared with a projection in May of 2.5 percent.
“King is remaining on the dovish side and, given that, we expect more QE down the line,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “That should send the pound lower against the dollar.”
Britain’s currency has declined 2.4 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar advanced 0.3 percent and the yen rose 2.6 percent.
The central bank’s stimulus program “is preventing things from getting much worse, but that doesn’t mean you couldn’t have an additional or better instrument,” Posen said in an interview with the Financial Times published today. “I don’t think it really matters that much what assets the central bank acts on.”
Ian McCafferty, chief economic adviser at the Confederation of British Industry, will replace Posen on Sept. 1 when he leaves to become president of the Peter G. Peterson Institute for International Economics in Washington.
U.K. government bonds declined, with the yield on the 10-year gilt advancing two basis points, or 0.02 percentage point, to 1.56 percent. The 4 percent security, maturing in March 2022, fell 0.205, or 2.05 pounds per 1,000-pound face amount, to 121.585.
Consumer prices rose an annual 2.3 percent last month, compared with a reading of 2.4 percent in June, according to the median forecast of 35 economists surveyed by Bloomberg News before tomorrow’s report. That would be the lowest since November 2009.
Gilts have returned 4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 3.6 percent and U.S. Treasuries rose 2 percent.
The U.K. Debt Management Office is considering selling one long-maturity gilt and one index-linked bond via banks in the period final three months of the year, it said today.
The London-based agency also plans to hold auctions for two short-, three medium- and two long-dated bonds in the period through Dec. 31, it said in a statement on its website. Three more auctions will be for index-linked debt.