Pound Rises as Carney Damps Bets on Greater Stimulus; Gilts Drop

The pound advanced versus the dollar after the future Bank of England Governor Mark Carney said the U.K.’s monetary policy may be enough to help the economy, damping speculation that he would expand stimulus.

Gilts fell as Carney, who takes over from Mervyn King in July, spoke. He was questioned by Members of Parliament before the Bank of England left its asset-purchase target and its benchmark interest rate unchanged. The London-based central bank also said it will reinvest proceeds from the first gilts to mature in its portfolio of debt bought under its quantitative-easing stimulus plan. The pound gained versus the euro after the European Central Bank left its key interest rate unchanged.

“The market was going into the testimony expecting a much more dovish outlook,” said Ned Rumpeltin, head of Group of 10 currency strategy at Standard Chartered Plc in London, referring to a perceived bias to loosen monetary policy. “With short positioning on the pound, and Carney was much more balanced and well-considered, that may have caught some people by surprise if they were looking for a much more assertive stance.” A short position refers to a bet that an asset’s price will fall.

The pound rose 0.2 percent to $1.5690 at 4:18 p.m. London time after dropping to $1.5631 two days ago, the lowest since Aug. 10. It gained 1.1 percent to 85.38 pence per euro after reaching 85.18 pence, the strongest level since Jan. 28.

Bank of England policy makers left the benchmark interest rate at a record-low 0.5 percent and held the asset-purchase target at 375 billion pounds, as predicted by all economists surveyed by Bloomberg News.

BOE Policy

Carney, 47, didn’t signal any plans to change current Bank of England policy.

“It is entirely possible -- I hedge because I’m not expert enough on the current situation in the U.K. -- in fact probable, that the current stance of policy is consistent with the economy achieving escape velocity,” Carney said today.

His comments and his first public appearance in the U.K. related to his new role, come less than two weeks after he said central banks aren’t “maxed out” on what they can do to drive their economies.

“I think the market will conclude that Carney will be ready to step up monetary policy if needed,” said Arne Rasmussen, the head of currency research at Danske Bank A/S in Copenhagen. “We stick to our view that sterling will suffer even more over the next couple of months. However, that said, he is certainly not saying that he will rock the boat the first day he becomes captain.”

Weighted Index

Sterling has dropped 3.3 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, as speculation the euro-area debt crisis is stabilizing damped demand for the pound as a haven. The euro rose 2.4 percent and the dollar gained 0.6 percent.

The 17-nation euro declined versus all but two of its 16 major counterparts as Draghi said after a policy meeting in Frankfurt that the risk to the region’s growth remains on the “downside.” The pound strengthened to 77.55 pence per euro in July last year as Europe’s turmoil intensified and investors sought alternatives to the region’s currency.

The 10-year gilt yield climbed one basis point, or 0.01 percentage point, to 2.11 percent after rising to 2.17 percent on Feb. 4, the highest since April 20. The 1.75 percent bond due September 2022 fell 0.1, or 1 pound per 1,000-pound face amount, to 96.92.

Reinvested Proceeds

The Bank of England will reinvest 6.6 billion pounds related to its holdings of 4.5 percent gilts that are due to be repaid on March 7. The securities are the first to mature since the central bank started its asset-purchase plan in March 2009.

The central bank didn’t say what it will do with future gilt redemptions. It said the 6.6 billion pounds comprises the redemption payment on the gilt, as well as the cashflow resulting from the indemnity provided by the Treasury to cover any difference between the redemption payment and the original amount invested.

In September, 1.6 billion pounds of 8 percent gilts held by the central bank will mature, before 21 billion pounds next year, according to data on the Bank of England’s website.

The 10-year break-even rate, derived from the yield difference between gilts and inflation-linked securities, rose five basis points to 3.22 percentage points. The rate reached 3.27 percentage points on Feb. 5, the most since April 14, 2011.

“We generally favor the linkers over the conventionals because you can argue the inflation risk premium in sterling bonds is likely to continue to rise,” Robin Marshall, a fixed-income director at Smith & Williamson Investment Management in London, which oversees the equivalent of $19 billion, said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua. “It’s hard for Carney to be hawkish. The linkers will come out of this a little better.”

Gilts handed investors a loss of 1.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.5 percent and Treasuries fell 0.8 percent.

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