The pound strengthened to a three-week high against the dollar as speculation the Bank of England will raise its benchmark interest rate earlier than it forecast spurred demand for the U.K. currency.
Sterling jumped the most this month versus the euro after people with knowledge of the discussion said the European Central Bank may cut its deposit rate to minus 0.1 percent. Bank of England policy makers said in the minutes of their November meeting released today that record-low borrowing costs may still be needed even after the jobless rate falls to 7 percent. U.K. government bonds declined for a second day.
“The broad story supporting sterling is still intact,” said Jeremy Hale, head of macro strategy at Citigroup Inc. in London. “While the minutes showed there was some discussion about not raising rates, I don’t think anyone particularly thought they would jump to hike anyway. It’s still clear that the economy has a lot of momentum and it’s clear that the direction for rates eventually is up.”
The pound advanced 0.2 percent to $1.6150 at 4:37 p.m. London time after increasing to $1.6178, the highest level since Oct. 28. The U.K. currency jumped 0.8 percent to 83.29 pence per euro, the biggest gain since Oct. 31.
The BOE minutes showed the nine-member Monetary Policy Committee voted unanimously to keep the benchmark rate at 0.5 percent and the asset-purchase program at 375 billion pounds at the meeting that ended Nov. 7.
“Once unemployment had reached 7 percent, the committee would reassess what it had learned about the nature of the recovery,” the MPC said. “In the meantime, the committee would continue to judge the appropriate stance for policy each month in line with the guidance given in August.”
The committee said data over the past month had not changed its assessment materially. The collective view was that productivity was “likely to increase over the forecast period,” it said.
Under the forward guidance policy introduced by Governor Mark Carney in August, the MPC has said it won’t consider raising its key rate at least until joblessness falls to 7 percent. In forecasts published last week, based on no change to the benchmark rate, it saw that threshold being reached at the end of next year.
The pound extended its advance versus the euro after two people familiar with the discussion told Bloomberg News the ECB was considering a smaller-than-normal cut in the deposit rate if officials decided to take it negative for the first time.
Policy makers would reduce the rate for commercial lenders who park excess cash at the central bank to minus 0.1 percent from zero, said the people who declined to be identified because the talks aren’t public.
The yield on the benchmark 10-year gilt rose one basis point to 2.74 percent after climbing as much as five basis points. The 2.25 percent bond maturing in September 2023 dropped 0.11, or 1.10 pounds per 1,000-pound face amount, to 95.84.
The Debt Management Office plans to sell 4.75 billion pounds of notes due in July 2019 tomorrow.
“The five-year area is not our favored area of the gilt curve with macro activity improvements likely to weigh further in 2014,” Shahid Ladha, an interest-rate strategist at BNP Paribas SA in London, wrote today in a note to clients. “Nonetheless, we do see support for the gilts market in the coming weeks. Investors may find gilts increasingly attractive versus bunds and Treasuries, given their sharp underperformance.”
Gilts fell 2.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.2 percent and Treasuries declined 2.3 percent.