Pound Rallies Versus Euro After BOE Refrains From More Stimulus

The pound rallied from the lowest in almost two weeks against the euro after the Bank of England refrained from expanding economic stimulus that tends to devalue the currency.

U.K. government bonds rose after the central bank decided to keep its asset-purchase target at 375 billion pounds ($565 billion), as forecast by 34 of 37 analysts surveyed by Bloomberg News. Policy makers also kept the benchmark interest rate at a record-low 0.5 percent. Sterling erased a decline against the dollar after an industry report showed Britain’s services output unexpectedly accelerated in March.

“The services data was a bit better than expected, which has given sterling a bit of gumption,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “No-one really expected a policy move today but there may have bit a bit of relief that there wasn’t an increase in the asset-purchase target. However, that doesn’t mean its completely off the table.”

Sterling rose 0.2 percent to 84.74 pence per euro at 1:26 p.m. London time after depreciating to 85.22 pence, the weakest since March 25. The pound was little changed at $1.5127 after falling to $1.5034, the lowest level since March 20.

Bank of England Governor Mervyn King and two colleagues were outvoted by the other six Monetary Policy Committee members in February and March in a push for a 25 billion-pound increase in so-called quantitative easing.

Economic Contraction

The U.K. economy shrank 0.3 percent in the last quarter of 2012, the Office for National Statistics confirmed last week. The figure for the three months through March will be announced on April 25.

“It seems policy makers are still divided over the efficacy of the quantitative-easing program,” John Stopford, head of fixed income at Investec Asset Management in London which oversees $105 billion, said before the decision was announced. “It’s likely that gilt yields will remain low in the near term given the economic backdrop, but as an investor we see little value in gilts at these levels.”

A gauge of U.K. services output based on a survey of purchasing managers rose to 52.4 last month from 51.8 in February, Markit Economics and the Chartered Institute of Purchasing and Supply said in London. Economists surveyed by Bloomberg News forecast a reading of 51.5. A level above 50 indicates expansion.

Little Difference

“The data has not really shown that much difference compared to previous months,” Laurent Fransolet, head of European fixed-income strategy at Barclays Plc, said in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua. Bank of England policy makers “are a little bit in wait and see mode at this time. It is probably better to hold off and present a bigger plan later.”

The pound has declined 4.8 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar has gained 3.2 percent and the euro has weakened 0.1 percent.

The benchmark 10-year gilt yield fell three basis points, or 0.03 percentage point, to 1.73 percent. The 1.75 percent bond due September 2022 rose 0.22, or 2.20 pounds per 1,000-pound face amount, to 100.18.

Gilts returned 0.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.4 percent and Treasuries rose 0.1 percent.

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