The pound fell against the dollar and government bonds surged as reports showed inflation unexpectedly slowed and retail sales slid in June, fueling speculation U.K. central bank rates will stay at a record low. The gains in gilts pushed the 10-year yield below 3 percent for the first time since November as the worsening debt crisis in Europe prompted investors to buy the securities as a haven. Consumer prices rose 4.2 percent from a year earlier, the Office for National Statistics said today in London. Economists had expected the gauge to stay at 4.5 percent, according to the median of 30 predictions in a Bloomberg survey. “The market has accepted that although there is a lot of inflation, the Bank of England is clearly in no rush to raise rates because it is focused on soft domestic demand,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The U.K. fundamentals look very poor.” The pound fell 0.5 percent to $1.5834 as of 10:16 a.m. in London, after dropping to $1.5781, the weakest level since Jan. 26. It lost 1.1 percent to 126.21 yen and was 0.3 percent stronger at 87.93 pence per euro. It earlier gained as much as 0.8 percent to 87.49 pence, the strongest level since June 16. Sterling has lost 6.5 percent in the past year, the second- biggest decline after the dollar, according to Bloomberg Correlation-Weighted Currency Indexes, which track 10 developed- market currencies. The Swiss franc has jumped 15 percent. Gilts Gain The British currency has dropped and the country’s bonds have risen this year amid speculation that slowing economic growth will limit the Bank of England’s ability to raise rates, while the Federal Reserve ends its bond-purchase stimulus program and the European Central Bank tightens monetary policy. The 10-year gilt yield fell nine basis points to 2.99 percent, pushing its decline in the past five days to 25 basis points. Two-year yields fell four basis points to 0.68 percent. Gilts have returned investors 1.9 percent since the end of June, compared with a 4.4 percent decline by Italian bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have handed investors a 2.8 percent loss, the indexes show. Sales fell 0.6 percent from a year earlier, following a 2.1 percent decline in May, the British Retail Consortium said today. The median estimate of six economists surveyed by Bloomberg was for a drop of 1.4 percent. To contact the reporter on this story: 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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