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U.K. 30-Year Break-Even Rate Drops on Inflation Calculation Plan

Sept. 19 (Bloomberg) -- The U.K. 30-year break-even rate, a gauge of investor expectations for inflation over the next three decades, dropped to a two-week low amid speculation the nation may change the way it calculates the retail-price index.

Sterling fell from near the strongest level in more than four months versus the dollar after minutes of the Bank of England’s September meeting showed policy makers voted unanimously to maintain their bond-purchase target this month. The Consumer Prices Advisory Committee said yesterday it will hold a consultation considering “any unjustifiable formula effect gap” between the retail-price index and the consumer-price index. Crude oil prices slid for a third day in New York.

“A change from the RPI to the CPI calculations would lower RPI and therefore give a lower return on RPI-linked securities,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “It might also have something to do with oil prices adding to that.”

The 30-year break-even rate, the difference in yield between nominal and index-linked bonds, narrowed four basis points to 2.90 percentage points at 4:29 p.m. London time. It dropped to as low as 2.89 percentage points, the least since Sept. 5.

Oil for October delivery slid 2.8 percent to $92.50 a barrel.

Gilt Returns

The 10-year nominal gilt yield slid four basis points, or 0.04 percentage point, to 1.84 percent. It’s fallen from 1.99 percent on Sept. 17, which was the highest since May 10.

U.K. gilts have handed investors a return of 1.9 percent this year, according to indexes compiled by Bank of America Merrill Lynch. Index-linked securities made a 2.6 percent loss.

The Bank of England’s Monetary Policy Committee voted 9-0 to keep the target for asset purchases at 375 billion pounds ($609 billion). It last expanded so-called quantitative easing in July and is currently buying 50 billion pounds of gilts in a program due to run until November. All members also agreed to hold the benchmark interest rate at 0.5 percent.

The minutes showed that the September decision was “more finely balanced” for one committee member, who saw a “good case” for adding more bond purchases this month.

The pound weakened 0.1 percent to $1.6224 after climbing to $1.6271. It advanced to $1.6273 on Sept. 17, the highest level since April 30. The U.K. currency weakened 0.3 percent to 80.54 pence per euro.

Sterling has appreciated 0.5 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 3.1 percent and the euro rose 3.3 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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