The pound slid to the weakest level in six months versus the euro and gilts rose as data showed inflation unexpectedly slowed and retail sales tumbled, damping speculation that the Bank of England will raise interest rates. Sterling fell to its lowest level in a week against the dollar. Consumer prices rose 4 percent from a year earlier after a 4.4 percent increase in February, the Office for National Statistics said. Economists surveyed by Bloomberg predicted the rate would remain unchanged. The yield on the two-year note tumbled as much as 14 basis points, while short-sterling futures advanced as traders scaled back bets for higher borrowing costs. “The trajectory for the pound is lower, certainly versus the euro, and potentially against the dollar,” said Kathleen Brooks, London-based research director at Forex.com, part of online currency trader Gain Capital Holdings Inc. “The Bank of England won’t hike interest rates until either late third quarter or early fourth quarter.” The pound depreciated 0.6 percent to 88.87 pence against the euro as of 4:38 p.m. in London, after dropping as much as 0.9 percent to 89.14 pence, the weakest level since Oct. 25. The U.K. currency declined 0.6 percent to $1.6256, after falling to $1.6227, the least since April 5. The Bank of England kept the main rate at an all-time low of 0.5 percent on April 7, while the European Central Bank raised its main refinancing rate to 1.25 percent from 1 percent on the same day to contain above-target inflation. U.K., German Spread The drop in two-year gilt yields was the biggest since Jan. 25 before they yielded 13 basis points lower at 1.26 percent. Ten-year yields fell 10 basis points to 3.71 percent. The difference in yield between German two-year notes and similar-maturity gilts increased eight basis points to 60, the widest margin since January 2009. The U.K. securities yielded more than their German counterparts as recently as February. The U.K. Debt Management Office plans to sell an additional 5 billion pounds ($8.1 billion) of 2 percent notes due January 2016 tomorrow. Gilts have lost investors 0.8 percent this month, pushing their decline in 2011 to 1.6 percent, according to indexes compiled by Bank of America Merrill Lynch. German bunds returned negative 0.8 percent this month and minus 3 percent this year, while U.S. Treasuries have returned minus 0.4 percent in April, down 0.6 percent since Dec 31. The implied yield on the September short-sterling futures contract dropped 13 basis points to 1.04 percent as traders reduced bets the Bank of England will lift rates. Sterling has strengthened 0.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which measure 10 developed-market currencies. It trails behind the euro’s 4.4 percent gain on speculation that the ECB would raise rates faster than the Bank of England. Retail Sales Britain’s currency underperformed its European counterpart amid speculation the central bank would refrain from raising rates to revive growth, even as inflation accelerated to more than twice its 2 percent target. Gross domestic product fell 0.5 percent in the fourth quarter, a government report showed on March 29. Data from the British Retail Consortium today showed retail sales plunged by a record in March. Sales at stores measured by value fell 1.9 percent from a year earlier, partly due to the timing of Easter in 2010, the London-based BRC said in a report today. That’s the biggest drop since the series began in 1995 and compares with a 1.1 percent gain in February. “Anemic growth and high inflation is probably the worst cocktail of economic data you can have,” said Shant Movsesian, a strategist in London at 4Cast Ltd., a research company that counts central banks among its subscribers. “There’s no real upside for sterling from here.” To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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