Pound Weakens for Third Day as U.K. Inflation Rate Falls to Zero

The pound depreciated for a third day versus the euro as a report showing U.K. inflation dropped to zero in February underpinned the case for the Bank of England to keep interest rates at a record low.

Sterling fell against all of its 16 major peers, reaching the weakest level in a month versus Europe’s shared currency. The slowdown in inflation from 0.3 percent in January was sharper than economists had forecast and marked the first zero reading since 1989. The cost of living in the U.S. excluding food and fuel rose in February, separate data showed. Federal Reserve policy makers are looking for inflation to accelerate as they weigh the timing of the first rate increase since 2006.

“It certainly suggests there could be a delay in terms of the timing of the first Bank of England move relative to the Fed,” said Derek Halpenny, head of European markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Incorporating the potential for a longer delay in the U.K. will certainly have sterling in a downward path.”

The pound depreciated 0.3 percent to 73.41 pence per euro as of 4:15 p.m. London time and touched 73.72 pence, the weakest level since Feb. 23. Sterling fell 0.5 percent to $1.4871 after reaching $1.4635 on March 18, the lowest since June 2010.

BOE Governor Mark Carney said March 12 that the pound’s strength is reinforcing disinflationary pressure on the economy, even as he stuck to the view that inflation will pick up and officials should “look through” the current weakness.

Rate Decision

The BOE’s Monetary Policy Committee kept the benchmark interest rate at a record-low 0.5 percent on March 5. The key rate has been at that level since March 2009, and the last increase was in July 2007.

Investors aren’t fully pricing a 25 basis-point, or 0.25 percentage-point, increase in the BOE’s key interest rate until after May 2016, compared with February earlier this month, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises borrowing costs.

“It is difficult to argue why we should be raising rates,” Bill Blain, a London-based strategist at Mint Partners Ltd., said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “We’ve got no inflationary threat. We still have very low wages, we still have a very low energy costs. We really are in a lower-for-longer scenario.”

U.K. government bonds halted a four-day advance, with the benchmark 10-year yield climbing from the lowest level in more than six weeks. The rate was little changed at 1.52 percent after earlier falling to 1.48 percent, the least since Feb. 5. The price of the 5 percent gilt due in March 2025 was 132.07 percent of face value.

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