Pound Gains Versus Euro as Bank of England Extends Loan Program

The pound rose for a third day against the euro amid speculation the Bank of England’s loan-program extension announced today will boost the economy.

Sterling strengthened to the most in more than a week versus the 17-nation common currency before a report tomorrow that analysts said will show the U.K. economy avoided recession in the first quarter. The Bank of England will extend its program to provide cheaper loans to companies and consumers by one year, enhancing a nine-month-old plan to boost growth, the central bank and the Treasury said today. Gilts advanced.

“The extension of the loan program is seen as sterling positive,” said Neil Jones, the head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “If successful, it will promote growth and investment, reducing the risk that the Bank of England has to print more money.”

Sterling appreciated 0.2 percent to 85.14 pence per euro at 4:38 p.m. London time after gaining to 84.97, the strongest since April 12. The pound advanced 0.1 percent to $1.5258 after sliding to $1.5197 yesterday, the lowest since April 4.

The Bank of England’s Funding for Lending Scheme will now last until January 2015, and will make loans to small companies more attractive and open to non-bank lenders, the central bank said.

German Sentiment

The pound pared gains after a report showed the Confederation of British Industry’s gauge of retail sales index unexpectedly fell this month. The measure of annual sales slipped to minus 1 from zero in March, the business lobby group said. Economists had forecast an increase to 8, according to the median of eight estimates in a Bloomberg News survey.

Sterling also rose against the euro as a German business climate index dropped to 104.4 from 106.7 March in April, a second month of declines. Economists in a Bloomberg News survey forecast a slide to 106.2, according to the median of 44 estimates.

Weak demand in the euro area, Britain’s biggest export market, combined with a fiscal squeeze and rising unemployment are stifling the U.K.’s economic recovery. Fitch Ratings cut the nation’s rating to AA+ from AAA on April 20, citing a weaker economic and fiscal outlook.

U.K. gross domestic product rose 0.1 percent in the three months through March 31, failing to recover the 0.3 percent decline in the fourth quarter of last year, according to the median of 37 economists in a Bloomberg News survey before the data is released tomorrow. From a year earlier, GDP increased 0.4 percent, the survey showed.

The pound has lost 3.3 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 3.7 percent and the euro rose 2 percent.

Gilt Auction

The Debt Management Office sold 1.3 billion pounds of inflation-protected securities maturing in March 2029. The index-linked debt was auctioned at an average yield of minus 0.635 percent, the lowest for this bond, according to the debt office. The sale drew bids of 1.51 times the amount of securities on offer.

The 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 1.69 percent. The 1.75 percent bond due September 2022 rose 0.25, or 2.50 pounds per 1,000-pound face amount, to 100.55.

U.K. gilts returned 1.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds and U.S. Treasuries earned 0.7 percent.

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