The pound fell to a 12-month low versus the dollar as the Bank of England held interest rates at a record low amid signs Britain’s economic recovery is ebbing.
Sterling declined the most in a week, even as a report today showed U.K. industrial production expanded more than analysts estimated. Separate data showed house prices dropped last month. The euro gained versus the pound as European Central Bank President Mario Draghi said its asset-purchase program would last at least two years. U.K. 10-year government bonds climbed. The central bank publishes its quarterly Inflation Report next week.
“There is little reason, while there are so few inflationary pressures, to start gambling with the policy normalization process,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “I don’t think now is the time and the Inflation Report will reflect that. The consensus is that they will downgrade growth, the housing market will be central to that.”
The pound fell 0.7 percent to $1.5862 at 4:50 p.m. London time. It dropped to $1.5869 yesterday, the lowest since Nov. 12, 2013. Sterling declined 0.1 percent to 78.27 pence per euro, after weakening as much as 0.6 percent.
The U.K. currency may decline to $1.50 within the next few months, Mellor said.
All 51 economists in a Bloomberg survey predicted the central bank would keep its benchmark rate at a record-low 0.5 percent, where it’s been since March 2009.
The ECB also kept interest rates at record lows today.
“Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate,” Draghi said at a press conference in Frankfurt today after the rate announcement.
House prices dropped 0.4 percent last month from September, according to Halifax, the mortgage unit of Lloyds Banking Group Plc.
Industrial output rose 0.6 percent in September compared with a drop of 0.1 percent in August, the Office for National Statistics said. The median estimate of economists in a Bloomberg News survey was for a gain of 0.4 percent.
The U.K. currency declined versus the dollar for four straight months through October, the longest losing run in 4 1/2 years, as investors pushed back their assessment of when the central bank would raise interest rates. Weighing on those expectations is a sputtering economy that saw the Citigroup Economic Surprise Index, which measures whether U.K. data are above or below market expectations, fall to its lowest level since March 2013 yesterday.
While Monetary Policy Committee members Martin Weale and Ian McCafferty have voted for an increase in the Bank Rate at the past three BOE meetings, Deputy Governor Jon Cunliffe said last week the central bank will keep supporting Britain’s recovery as long as it can while keeping inflation in check.
Forward contracts based on the sterling overnight interbank average, or Sonia, show investors have pushed back bets on a 25 basis-point increase in U.K. borrowing costs beyond September. As recently as August, the market was pricing a move by the central bank in February.
“The surveys haven’t been quite so strong, and the housing market has certainly come off the hectic pace we saw earlier in the year,” Kate Barker, a former BOE policy maker and now a senior adviser at Credit Suisse Group AG, said in an interview on Bloomberg Television’s “Countdown” with Manus Cranny and Anna Edwards. “Whether it’s right to push rate expectations back so far, I’m not sure.”
Ten-year gilt yields slipped two basis points, or 0.02 percentage points, to 2.25 percent. The 2.75 percent bond due in September 2024 rose 0.135, or 1.35 pounds per 1,000-pound face amount, to 104.43.
Gilts returned 9.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. Euro-area government securities gained 10 percent and U.S. Treasuries earned 4.9 percent.