By Lukanyo Mnyanda Nov. 19 (Bloomberg) -- The pound rose against the dollar and the euro as the Bank of England indicated it’s prepared to cut interest rates again, now at the lowest level since 1955, to revive the economy. “There’s a sense they’re ready to be more aggressive in addressing the economic problems, and the market appears to be taking that as a positive step,” said Russell Jones, head of global fixed-income and currency research in London at RBC Capital Markets. “It remains uncertain whether this will be sustained. There’re a lot of problems to be worked out.” Bank of England policy makers, led by Governor Mervyn King, considered a bigger reduction in the benchmark interest rate than the 1.5 percentage points announced Nov. 6, according to the minutes of their meeting preceding that decision. The pound climbed 2 percent to $1.5249, the highest level since Nov. 12, and was at $1.5079 as of 4:40 p.m. in London, from $1.4958 yesterday. The U.K. currency is down 24 percent against the dollar this year. Against the euro, it climbed to 83.58 pence, from 84.35 pence, reducing its decline this year to 14 percent. It reached a record low of 86.63 pence last week. Investors should use gains by the pound as an opportunity to sell the currency, Jones said, without providing a forecast. The Bank of England discussed the need for a reduction to less than 2.5 percent, before the monetary policy committee voted 9-0 to lower the rate to 3 percent, according to the minutes, released today. Tax Plans Policy makers limited the reduction to 1.5 percentage points because they wanted to wait for details of government tax plans and see the effects of the state rescue of financial institutions. Britain’s currency extended gains against the dollar after a government report showed U.S. consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947. The pound also rose as the dollar extended losses against the euro after passing $1.27, a level where orders to buy the 15-nation currency were clustered. “The latest spike is part of a broad dollar decline,” Ashraf Laidi, chief currency strategist at CMC Markets in New York, wrote in a client note today. The European Central Bank, headed by Jean-Claude Trichet, cut its main rate half a point to 3.25 percent this month, pushing it below the Bank of England’s for the first time since the euro’s debut in 1999. “Most of the bad news has already come out and the currency should consolidate,” said Roberto Mialich, a Milan- based currency strategist at Unicredit Markets & Investment Banking. “The dovish inflation outlook has prompted the markets to price in more aggressive rate cuts from the Bank of England.” December Futures The implied yield on the short-sterling December futures contract was at 3.44 percent today, pushing its decline since Oct. 31 to 77 basis points. The equivalent rate in euros was 3.38 percent, a drop of 19 basis points this month. U.K. 10-year government bonds, which are more sensitive to the inflation outlook, rose. The yield slipped three basis points to 4.04 percent. The 5 percent security due March 2018 advanced 0.27, or 2.7 pounds per 1,000 pound face amount, to 107.35. The yield on the two-year note rose five basis points to 2.13 percent. Yields move inversely to bond prices. The difference in yield between the two-year and the 10- year gilt narrowed from the most since 1993. The spread was 190 basis points, from 198 basis points yesterday. Investors bought longer-dated notes on speculation the rate cuts from the Bank of England will push inflation below its 2 percent target. British bonds rallied this month as investors’ inflation expectations fell, with the U.K.’s five-year breakeven rate dropping below zero for the first time yesterday, reflecting forecasts that prices will fall. The conventional gilt yielded 0.1 percentage point less than its inflation-protected counterpart today. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Source