The pound strengthened against the euro after a report showed U.K. inflation accelerated more than forecast last month, reducing the likelihood that the central bank may inject further monetary stimulus to the economy. Sterling rose against 11 of its 16 major peers tracked by Bloomberg. Consumer-price inflation accelerated to an annual 4.4 percent in July, from 4.2 percent the previous month, the Office for National Statistics said in London today. Economists had predicted a 4.3 percent reading, according to the median estimate in a Bloomberg survey. Bank of England Governor Mervyn King maintained inflation would fall below target as global financial turmoil hurts growth. Gilts advanced. “Raising rates just doesn’t make sense in this economic environment but I doubt very much that there will be further quantitative easing,” said Mike Berg, a foreign exchange strategist at 4Cast Ltd. in London. “Central banks across the world are at a loss as to how to stimulate economic growth without letting inflation get out of hand. Sterling remains trapped.” The pound gained 0.5 percent against the euro to 87.73 pence as of 11:48 a.m. in London. It was little changed at $1.6379, paring an earlier 0.4 percent decline. Sterling lost 0.1 percent to 125.77 yen. Investors are betting the Bank of England won’t raise borrowing costs until after July next year, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average, or Sonia, show. As recently as February, the data indicated traders were betting on a rate increase this May. King said inflation could fall below target. King’s Letter “Recent developments in world stock markets and in the euro area are of particular concern,” King said in a letter to Chancellor of the Exchequer George Osborne after inflation kept above the central bank’s 3 percent ceiling. There is a risk of “severe stress and dislocation in financial markets and, were this risk to crystallize, it would have a significant impact on the U.K. economy.” “The BOE definitely can’t afford to consider QE with inflation at these levels,” said Elizabeth Gregory, a Geneva- based market strategist at Swissquote Bank SA. “It’s one thing having to write a letter to the chancellor explaining that CPI is more than double its intended target when you are passively letting it happen, it’s quite another to be doing so while actively stoking inflation higher with quantitative easing.” Meeting Minutes The central bank will tomorrow publish minutes of its Aug. 3-4 policy meeting, when it left its benchmark interest rate on hold at 0.5 percent. The 10-year gilt yield was two basis points lower at 2.52 percent. Two-year yields declined five basis points to 0.62 percent. Osborne said on Aug. 11 that the U.K.’s recovery will “take longer and be harder,” while King signaled a day earlier that he may resume pumping cash into the economy to boost growth. Britain’s economy will expand 1.2 percent this year, compared with a projected 3.4 percent in Germany and a 1.8 percent increase in the U.S., Bloomberg surveys show. 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

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