Pound Falls Versus Euro as Carney Warns of Housing Risks

The pound fell against the euro for the first time in three days after Bank of England Governor Mark Carney said surging house prices posed the biggest risk to the U.K. economy.

Sterling was little changed versus the dollar as Rightmove Plc said asking prices for London homes jumped to a record this month. Futures traders reduced bets that the pound will rise against the U.S. currency for a fourth week and UBS AG said investors should sell sterling against the greenback as the market has overpriced interest-rate increases. Carney said last week the central bank is prepared to wait until next year to increase borrowing costs as there remains slack in the economy.

“The U.K. housing market has a deep structural issue that could undermine the economy and is negative for the pound,” said Geoffrey Yu, a senior currency strategist at UBS AG in London. “It’s unlikely the Bank of England will use an interest-rate increase as a policy tool to rein in the market, unless as a last resort.”

The pound weakened 0.1 percent to 81.54 pence per euro at 4:28 p.m. London time. It reached 81.27 pence on May 14, the strongest since January 2013. Sterling was at $1.6824 after climbing to $1.6996 on May 6, the highest since August 2009.

Sterling will fall to $1.65 by the end of the year, according to the median forecast of analysts in a Bloomberg News survey.

Mortgage Checks

Carney said policy makers “could do more” to tackle the risks of rising house prices. Options include imposing more checks on the affordability of mortgages, limiting types of loans or advising the government to rein in its stimulus program.

Values of homes in London climbed 3.3 percent from April to an average 592,763 pounds, the property website operator said today. Across England and Wales, prices rose 3.6 percent, the most for this time of year since 2002, reaching an all-time high of 272,003 pounds.

Futures traders decreased their bets on further gains in the pound. The difference in the number of wagers by hedge funds and other large speculators on an advance in the currency compared with those on a drop -- so-called net longs -- was 31,755 on May 13, compared with net longs of 40,646 a week earlier, according to figures from the Washington-based Commodity Futures Trading Commission.

Consumer Prices

U.K. 10-year government bonds fell before a report tomorrow that economists said will show inflation remained near a 4 1/2-year low in April.

Consumer prices rose 1.7 percent from a year ago last month, according to the median estimate in a Bloomberg survey. The inflation rate was 1.6 percent in March, the lowest since October 2009. It has been below the BOE’s 2 percent goal since December, helping to support Carney’s case for keeping the benchmark interest rate at a record-low 0.5 percent, where it’s been since March 2009.

The yield on 10-year gilts climbed two basis points, or 0.02 percentage point, to 2.58 percent. The 2.25 percent bond due in September 2023 fell 0.145, or 1.45 pounds per 1,000-pound face amount, to 97.27. The two-year gilt yield was little changed at 0.69 percent.

The five-year break-even rate was at 2.94 percentage points, compared with this year’s average of 2.86 percentage points. The rate, a gauge of market inflation expectation, is the yield difference between nominal and index-linked bonds.

Gilts returned 4 percent this year through May 16, according to Bloomberg World Bond Indexes. Treasuries gained 3.2 percent and German securities earned 4.1 percent.

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