by - Feb 10, 2011 5:51 PM GMT+0800
The pound appreciated versus the euro before the Bank of England’s interest-rate decision as traders sought to protect themselves against an unexpected increase in the bank rate.
Sterling appreciated against 12 of its 16 most-actively traded counterparts monitored by Bloomberg. The Monetary Policy Committee, led by Governor Mervyn King, will leave its 0.5 percent key interest rate unchanged, according to all 62 economists surveyed by Bloomberg. Money-market rates yesterday were pricing in a 20 percent probability of a rate increase, according to Sam Hill, a sterling strategist at RBC Capital Markets in London. The pound stayed higher versus the euro after a report showed U.K. manufacturing unexpectedly contracted in December.
“Fear that the Bank of England may hike is likely to put a floor under the pound in the next few hours,” Jane Foley, a senior currency strategist at Rabobank International Ltd., said in an e-mailed note. “The debate over whether the Bank will bring forward rate hikes this year is wide open.”
The pound appreciated 0.4 percent to 84.93 pence per euro at 9:50 a.m. in London. Britain’s currency fell 0.3 percent against the dollar to $1.6048.
U.K. two-year gilts rose, pushing the yield on the 4.5 percent security due March 2013 down four basis points to 1.51 percent. The note rose 0.85, or 85 pence per 1,000-pound face amount, to 106.08.
The central bank is under growing pressure to raise borrowing costs for the first time in more than 3 1/2 years as consumer prices rise at almost twice the pace of its 2 percent limit. Inflation accelerated to 3.7 percent in December, equaling the reading in April, which was the highest since November 2008.
‘Losing Credibility’
Former policy maker DeAnne Julius said yesterday the Bank of England needs to tighten policy “sooner rather than later” or risk losing credibility. The comments come after Monetary Policy Committee member Martin Weale joined colleague Andrew Sentance in voting for a rate increase at the group’s Jan. 13 meeting on concern that inflation may become entrenched.
“Nobody seems to be looking for a hike in rates, but few seem to be entirely comfortable holding such a view,” Steve Barrow, the London-based head of research for Group-of-10 currencies at Standard Bank Plc, wrote in a client note today.
Short-sterling futures rose, reducing the implied yield on the contract expiring in December by five basis points to 1.67 percent. A lower yield indicates investors are reducing bets that policy makers will increase borrowing costs.
Rate Speculation
Speculation that policy makers will be forced to raise rates sometime in 2011 has helped the pound gain almost 3 percent versus the dollar since the start of this year, while two-year bond yields climbed to a two-year high. Policy makers will raise the rate by 25 basis points in the fourth quarter with no further increase expected this year, according to a Bloomberg survey of 41 analysts.
The U.K. 10-year breakeven rate, an indication of investors’ inflation expectations over the life of the securities, derived from the yield gap between conventional and index-linked bonds, was little changed at 3.26 percent. The rate climbed as high 3.33 percent on Feb. 7, the highest level since September 2008.
Britain’s central bank announces its interest-rate decision at 12 p.m. in London today.
Factory output fell 0.1 percent from November, when it rose 0.6 percent, the Office for National Statistics said today in London. That’s the first decline since April. The median forecast of 25 economists in a Bloomberg News survey was for an increase of 0.4 percent. The decline has an impact of less than 0.1 percent on fourth quarter gross-domestic-product, which showed a 0.5 percent drop, the office said.
To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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