Pound Declines as King Says Inflation to Stay Above 2%

The pound had its biggest weekly drop against the dollar since June after Bank of England Governor Mervyn King said inflation will stay above the Bank’s 2 percent target for the next two years even with weak growth.

The pound declined against all of its 16 major peers this week as the Confederation of British Industry, the U.K.’s biggest business lobby group, lowered its 2013 growth projection to 1 percent from 1.4 percent. King said on Feb. 13 that the economy faces “big challenges” and there were “limits” to what policy makers could achieve. Gilts fell, with the 10-year yield climbing to the highest level since April.

“It’s hard to recommend sterling as a buy,” said John Hardy, head of currency strategy at Saxo Bank A/S in London. “When the Bank of England implied they are comfortable with inflation and that there could be further easing, a longer-term outlook for sterling is not positive.”

The pound dropped 1.8 percent last week to $1.5521 at 5:10 p.m. in London yesterday, the steepest decline since the period ended June 1. It fell to $1.5462, the lowest since July 25. Sterling depreciated 1.8 percent from Feb. 8 to 86.06 pence per euro. That’s the fifth weekly drop against the single currency in seven.

Data last week added to evidence that the U.K. economic expansion is slowing. Retail sales unexpectedly fell in January for a second consecutive month. Sales including fuel declined 0.6 percent from December, when they dropped a revised 0.3 percent, the Office for National Statistics said yesterday. The median forecast of 24 economists in a Bloomberg News survey was for an increase of 0.5 percent.

Pound’s Slide

The pound depreciated 4.4 percent this year, making it the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.7 percent and the euro rose 2.1 percent.

The outlook for consumer prices is higher than was forecast in November because of a weaker pound and increases in energy bills, the Bank of England said in its quarterly Inflation Report released on Feb. 13. The Monetary Policy Committee kept its asset-purchase target at 375 billion pounds and its main interest rate at a record-low 0.5 percent when it met on Feb. 7.

The 10-year gilt yield rose 10 basis points, or 0.1 percentage point, from Feb. 8 to 2.19 percent. The rate climbed to 2.27 percent on Feb. 14, the highest since April 2. The price of the 1.75 percent bond due September 2022 fell 0.815, or 8.15 pounds per 1,000-pound face amount, to 96.205.

Inflation expectations rose to the highest level in nearly two years. The 10-year break-even rate, a market gauge of inflation expectations derived from a yield gap between gilts and index-linked securities, increased to 3.29 percentage points on Feb. 14, the most since April 13, 2011.

Gilts handed investors a loss of 2.7 percent this year through Feb. 14, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.6 percent and Treasuries fell 0.8 percent.

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