Pound Falls Most in 9 Months Versus Euro; Gilts Outperform Bunds

The pound slid the most in nine months versus the euro as the Bank of England kept interest rates at a record low while the European Central Bank gave no indication it will introduce further stimulus.

The U.K. currency weakened against all its 16 major counterparts even as Chancellor of the Exchequer George Osborne raised the nation’s growth forecast in his Autumn Statement for the first time since 2010. U.K. government bonds outperformed German bunds on the outlook for diverging monetary policy and as Osborne said borrowing requirements will fall in coming years.

“The BOE was no surprise but the minutes will be interesting,” said Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London. “That’s where the continuing shift to a more hawkish stance will occur. As for the Autumn Statement, it is full of good news, but largely expected in the market.”

Sterling slumped 0.9 percent to 83.74 pence per euro at 4:36 p.m. London time, the biggest decline since March 7. The pound dropped 0.4 percent to $1.6315 after climbing to $1.6443 on Dec. 2, the highest since August 2011.

The U.K. currency will strengthen to $1.65 by year-end and $1.70 by the middle of 2014, Mizuho Bank’s Jones said.

The BOE kept its official bank rate at 0.5 percent, in line with all 48 economist estimates in a Bloomberg News survey, and left its asset-purchase target at 375 billion pounds.

Deposit Rate

While the ECB left its benchmark at a record-low 0.25 percent, President Mario Draghi said policy makers only briefly discussed introducing a negative deposit rate at its meeting today in Frankfurt. The deposit rate is what the ECB charges banks for parking excess cash at the central bank. It is currently set at zero.

“It’s what Draghi didn’t say that is pushing the euro higher,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “There is no indication of negative deposit rates or further easing.”

The pound has gained 5.9 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid speculation stronger growth may hasten increases in central bank rates. The euro rose 4.1 percent, while the dollar weakened 0.7 percent.

The Bank of England’s nine-member Monetary Policy Committee led by Governor Mark Carney has pledged to keep its benchmark rate low until unemployment, currently at 7.6 percent, falls below 7 percent.

Sales Reduced

The Debt Management Office will trim its gilt issuance to 153.7 billion pounds from the 155.7 billion pounds it forecast in April, it said after Osborne’s Autumn Statement, in line with the median estimate of 19 primary dealers surveyed by Bloomberg News. The stock of Treasury bills will be 56.5 billion pounds at the end of the fiscal year, from a previous target of 70 billion pounds, the debt office said.

“As things stand, this supply isn’t a problem,” said Robin Marshall, a director for fixed income at Smith & Williamson Investment Management in London, which has $23 billion in assets. “The market performance will be driven by the level of interest rates on the policy setting rather than the level of issuance, because this level of issuance is perfectly manageable.”

The benchmark 10-year gilt yield was little changed at 2.91 percent. The price of the 2.25 percent bond due in September 2023 was 94.42. German 10-year yields climbed four basis points to 1.85 percent.

Quicker Growth

With the U.K. economy set to grow 1.4 percent this year, up from a previous projection of 0.6 percent, Britain will borrow 111 billion pounds this year, 9 billion less than predicted in March, Osborne said. That will fall to 96 billion pounds in 2014-15 and 79 billion pounds in 2015-16, then 51 billion pounds in 2016-17 and 23 billion pounds in 2017-18, he told lawmakers.

“We’re set to borrow 73 billion pounds less over the period than was forecast in March,” Osborne said. “If we give up on the plan now, we’d be saddled with a deficit that is still among the highest in Europe.”

U.K. government bonds handed investors a loss of 4 percent this year through yesterday, according to Bloomberg World Bond Bond Indexes. German bonds dropped 1.6 percent and U.S. Treasuries declined 2.7 percent.