The pound rose against the euro after minutes of the Bank of England’s last meeting showed policy makers voted to keep interest rates at a record low and said the inflation outlook may worsen. Sterling was little changed versus the dollar, trading within 3 cents of its strongest level since April. Policy makers led by Governor Mervyn King voted 7-1 to keep the main rate at 0.5 percent at their July 8 meeting, the minutes released in London today showed. While it was “too early” to fully assess the implications of government budget cuts on inflation, they said the planned sales-tax increase would probably add to consumer-price growth in 2011. “The picture for sterling remains positive,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. “The BOE is in a more difficult position, in the sense that it has to face a dilemma because inflation remains high.” The pound appreciated 0.6 percent against the euro to 83.91 pence as of 1:24 p.m. in London. It’s set for its first back-to- back gains versus the 16-nation euro since June 29. It was at $1.5257. It rose to $1.5472 last week. Policy makers voted unanimously to maintain their debt- buying program at 200 billion pounds ($305 billion). Andrew Sentance voted for a rate increase, maintaining his stance from the June meeting, when he made the first push for policy tightening in almost two years, the notes showed. U.K. government bonds rose, with the yield on the two-year gilt falling two basis points to 0.78 percent. The 10-year yield also dropped two basis points, to 3.34 percent. Pound Optimism The pound advanced 1 percent against the dollar and strengthened 0.6 percent against the euro on June 23, when minutes of the Monetary Policy Committee’s meeting 13 days earlier showed Sentance’s vote for tighter policy. Britain’s currency has gained 5.5 percent against the euro this year amid investor bets that the U.K. economy will recover more quickly than the euro area, which has suffered from the region’s sovereign debt crisis. The U.K. will probably expand by 1.2 percent this year compared with 1.05 percent for the countries that share the euro, Bloomberg surveys show. “We are still quite optimistic on the pound as we know the economy is much more flexible than in the euro zone,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. Gilts returned 6 percent so far this year, compared with a profit of 3.1 percent in the euro area, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Inflation Outlook The U.K.’s 10-year breakeven rate decreased to 265 basis points today, the lowest since Oct. 15. The rate, which measures the yield difference between regular and index-linked bonds and anticipates consumer-price growth during the next decade, was as high as 325 basis points on April 21. “We are not anticipating the Bank of England to move on rates anytime soon,” said Lauren Rosborough, a senior currency analyst at Westpac Banking Corp. in London. Still, policy makers are “very concerned” to get “a better sense of what’s going on with inflation,” she said. The U.K.’s inflation rate rose to a 17-month high in April and was at 3.2 percent in June, above the government’s 3 percent upper limit. Consumers’ inflation expectations for the coming 12 months fell to 2.7 percent in July from 3 percent the previous month, Citigroup Inc. said in an e-mailed statement today, citing a YouGov Plc poll. Gains by the pound may be limited as investors bet that other data signaling the recovery isn’t yet secure will keep inflation from accelerating and may prompt policy makers to expand their asset-purchase program. The Bank of England’s inflation forecasts signal that the bank’s next move should be most likely to expand emergency stimulus, policy maker Adam Posen said, according to Dow Jones Newswires. They show a “more than 50 percent likelihood in my estimation the right next move will be to loosen rather than to tighten” monetary policy, Dow Jones cited him yesterday as saying in an interview. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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