Feb. 26 (Bloomberg) -- The pound will extend its world-beating advance of the past year as the Bank of England shows little concern a strong currency will harm the economy, according to Citigroup Inc.
Sterling rose for a third day versus the euro as central bank Monetary Policy Committee member Ben Broadbent said the currency’s level reflects the strength of the British economy. The pound is the best performer over the past 12 months among 10 major currencies as data from gross domestic product to construction stoke bets the recovery is gaining pace even though inflation is below the BOE’s 2 percent target. U.K. government bonds climbed.
“The view is still that the MPC has not seen evidence that strong sterling is jeopardizing the recovery or putting the MPC inflation target at risk,” said Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup in London. “The comments do suggest that the Bank of England would not object strongly if the pound were to strengthen some more. This could encourage more buying. Bets on early stimulus removal could add to sterling’s rate advantage.”
The pound advanced 0.3 percent to 82.12 pence per euro at 4:58 p.m. London time, having strengthened 0.7 percent this week. The U.K. currency fell 0.2 percent to $1.6648 after rising to $1.6823 on Feb. 17, the highest since November 2009.
Sterling will appreciate to 80 pence per euro by the end of May and to 79 pence in the next 12 months, Marinov said.
Sterling has rallied 13 percent in the past year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro gained 6.5 percent and the dollar rose 1.3 percent.
“The strength of sterling is really a reflection of the fact that the rest of the world, Europe in particular, hasn’t grown much,” Broadbent said at a conference in London.
Britain’s GDP increased 0.7 percent in the fourth quarter from the previous three months, the same as previously estimated, the Office for National Statistics said today. From a year earlier, the economy expanded 2.7 percent, the most in almost six years.
The pound fell for the first time in three days against the dollar, dropping the most since Feb. 3, after Commerce Department data showed sales of new U.S. homes unexpectedly climbed in January to the highest level in more than five years.
“We are getting a U.S. dollar bounce this afternoon,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The stronger-than-expected U.S. new-home-sales report has also helped provide support.”
The pound has strengthened 1 percent this year, according to the Bloomberg indexes, even as Bank of England Governor Mark Carney has said he is in no rush to boost interest rates from a record-low 0.5 percent. He told reporters in Sydney on Feb. 24 the central bank will “not take risks with the economy” and that rates would be set with economic stability in mind.
U.K. policy maker David Miles said today it may be appropriate for the central bank to increase borrowing costs next year.
“When interest rates do go up, it’s more likely than not to be a very gradual series of increases,” Miles said in a BBC television interview. “It may be that some time next year may be the right time” to raise interest rates, “but it’s difficult to predict,” he said.
Colleague Ian McCafferty said yesterday that sterling’s gains were not yet a “major problem” for exporters. The MPC would need to take the exchange rate into account “when determining what the appropriate monetary stance would be going forward,” he said.
The yield on 10-year bonds dropped two basis points, or 0.02 percentage point, to 2.73 percent. The 2.25 percent security due September 2023 advanced 0.155, or 1.55 pounds per 1,000-pound face amount, to 96.04.
Gilts returned 2.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities climbed 2 percent and U.S. Treasuries gained 1.8 percent.
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