BLBG:Pound Snaps Its Two-Day Decline Against Euro Before BOE’s Inflation Report
The pound strengthened against the dollar and the euro after the Bank of England said it sees inflation “markedly higher” in the near term amid record low borrowing costs. Gilts slumped.
Sterling advanced versus all but one of its 16 major counterparts, snapping a two-day decline against the shared European currency. “There is a good chance that inflation will reach 5 percent later this year and it is more likely than not to remain above the 2 percent target throughout 2012,” the bank said in its inflation report today. Risks to economic growth are “skewed to the downside,” the report said.
“The reaction of the pound is predominantly due to the admission that inflation is going to hit 5 percent at some point this year,” said Elizabeth Gregory, a Geneva-based market strategist at Swissquote Bank SA. “The BOE doesn’t have the luxury of waiting for growth to solidify if it wants to maintain its credibility. They’re going to have to hike by at least the third quarter and possibly again in the fourth quarter.”
The pound appreciated 0.7 percent to 87.39 pence per euro as of 10:51 a.m. in London. Sterling also rose 0.7 percent versus the dollar, to $1.6479.
U.K. 10-year gilt yields rose eight basis points to 3.46 percent. The yield on the two-year note climbed seven basis points to 1.09 percent.
The Bank of England left its main interest rate at a record low 0.5 percent on May 5, three days after King indicated he favors keeping borrowing costs on hold, even as inflation accelerates at twice the bank’s 2 percent limit.
A separate report today showed Britain’s trade deficit widened more than estimated in March as exports to countries outside the European Union fell. The goods-trade gap rose to 7.66 billion pounds, compared with 6.99 billion pounds in February, the Office for National Statistics said today in London. The shortfall was bigger than the 7.5 billion-pound median estimate of 13 economists surveyed by Bloomberg.
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
