BLBG: Pound Gains After Policy Makers Cut Main Rate to 1.50 Percent
The pound strengthened against the euro and the dollar after the Bank of England cut its benchmark interest rate to an all-time low of 1.5 percent to limit the fallout from Britain’s first recession in 17 years.
Government bonds rose as the Monetary Policy Committee, led by Governor Mervyn King, lowered the main rate by 50 basis points, in line with economists’ predictions. It was the central bank’s fourth cut since the global coordinated emergency reductions on Oct. 8.
“It would take something extreme in terms of rate cuts to weaken sterling at the moment,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG, the world’s largest foreign-exchange trader. “That’s what the market was expecting.”
The pound advanced to 89.28 pence per euro as of 12:15 p.m. in London, from 90.35 pence yesterday. It was at $1.5181 versus the dollar, from $1.5095.
Any U.K. rate cut today would have brought the benchmark to the lowest since the Bank of England’s foundation in 1694. The European Central Bank has trimmed its key interest rate by 1.75 percentage points to 2.50 percent since early October, and may reduce it again next week.
The pound strengthened yesterday to less than 90 pence per euro for the first time in three weeks on speculation the ECB will step up the pace of rate cuts as the common-currency region slides deeper into a recession.
Bonds Climb
Chancellor of the Exchequer Alistair Darling signaled in an interview with the Financial Times the U.K. Treasury may need to play a bigger role in setting monetary policy if interest rates approach zero. The pound dropped to a record low against the euro last week on speculation the central bank will keep cutting borrowing costs as the recession deepens, stoking unemployment.
The British government is “looking at what else we would need to do,” Darling said in the Financial Times interview published today. “The closer interest rates come down to zero, the more the normal transmission mechanism and the operation of monetary policy has to be looked at.”
If the Treasury embarks on quantitative easing, the government may authorize the central bank to buy assets including government securities and even print money to pay for them, according to analysts.
U.K. government bonds rose, pushing the yield on the 10- year gilt down four basis points to 3.24 percent. The 5 percent security due March 2018 added 0.32, or 3.2 pounds per 1,000- pound face amount, to 113.82. The two-year gilt yield was at 1.69 percent.
