The pound rose for a fourth day against the dollar as minutes showed Bank of England policy makers voted 8-1 to pause a bond-buying program as risks from the euro-area crisis ease and inflation concerns persist.
Sterling climbed to a three-month high versus the U.S. currency as the minutes of the Dec. 5-6 meeting showed David Miles dissented and sought to increase the asset-purchase target by 25 billion pounds ($40.7 billion). All nine members of the Monetary Policy Committee voted to keep the benchmark interest rate at a record low of 0.5 percent. U.K. government bonds fell for a ninth day, the longest losing run since February 2011.
“The market will interpret the 8-1 as being about as hawkish as one can expect,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “They will begin to price in the possibility of a stronger economic performance in the first quarter, and consequently there’ll be demand for the pound and sterling assets.”
The pound strengthened 0.1 percent to $1.6273 at 4:13 p.m. in London after rising to $1.6307, the highest level since Sept. 21. The U.K. currency fell 0.1 percent to 81.49 pence per euro.
Sterling will strengthen to about $1.67 and 77.50 pence per euro at the end of the first quarter, Mizuho’s Jones said. A Bloomberg survey of economists forecasts the U.K. currency will trade at $1.60 and 80 pence per euro by March 31.
The Bank of England halted bond purchases or quantitative easing in November and is relying on its so-called Funding for Lending Scheme to boost credit and aid the economic recovery. The MPC said early signs of the program were “encouraging.” Still, it said the economy may shrink this quarter and surveys pointed to “broadly flat underlying output” in the near term.
The 10-year gilt yield rose one basis point, or 0.01 percentage point, to 1.96 percent after climbing to 1.99 percent, the highest level since May 10. The 1.75 percent bond due in September 2022 dropped 0.05, or 50 pence per 1,000-pound face amount, to 98.16.
The 10-year break-even rate, a measure of expectations of inflation derived from a difference in yield between gilts and index-linked securities, dropped two basis points to 2.74 percentage points, after climbing to 2.79 percentage points yesterday, the most since April 19.
Investors holding gilts lost 1.5 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds were little changed while Treasuries fell 0.9 percent.
The strength in the pound this year was making the U.K. less competitive, the central bank’s minutes showed.
Sterling’s gains between the middle of 2011 and middle of 2012 “had been unwelcome,” according to the statement. The “deterioration in U.K. competitiveness over the past couple of years represented a potential headwind to the ability of U.K. exporters to benefit from a pickup in global growth.”
The pound has appreciated 1.5 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 0.9 percent and the dollar fell 3.6 percent.
“They are not giving any clear suggestion that they are ready for more QE, but that is something which could well happen fairly early next year,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “We see them use the phrase that sterling strength is unwelcome. All of this is increasingly bringing sterling into the policy debate.”
U.K. retail-sales growth slowed more than economists forecast in December, a report from the Confederation of British Industry showed. The gauge of annual sales growth fell to 19 from 33 in November, the business lobby said. Economists had forecast a decline to 25, according to a Bloomberg News survey.