The pound weakened against the dollar for the second day and gilts rose as traders judged a surprise increase in U.K. manufacturing as insufficient to keep the Bank of England from providing further stimulus for the economy. Sterling depreciated against all but one of its 16 major peers. A gauge of manufacturing rose to 51.1 from 49.4 in August, a survey by Markit Economics and the Chartered Institute of Purchasing and Supply showed. That was higher than the 48.5 median forecast in a Bloomberg survey and above the 50 level that indicates expansion. “Certain bits of data might come out a bit more positive, but the overall outlook for the U.K. economy isn’t very good,” said Shant Movsesian, a strategist in London at 4Cast Ltd., a research company that counts central banks among its customers. “More quantitative easing is the only way forward. Sterling has already taken a big hit, but pound-dollar can still go lower.” The pound declined 0.3 percent to $1.5532 at 11:15 a.m. in London, and was 0.1 percent weaker at 86.01 pence per euro. Sterling slid 0.5 percent to 119.43 yen. The yield on the 10-year gilt dropped seven basis points to 2.36 percent. The 3.75 percent security due September 2021 rose 0.67, or 6.7 pounds per 1,000-pound face amount, to 112.26. Five-year yields slid three basis points to 1.33 percent, with the yield on the two-year note little changed at 0.58 percent. QE, Inflation Bank of England policy makers said in minutes of last month’s policy meeting on Sept. 8 that it is becoming “increasingly probable” that another round of government-bond purchases may be needed to boost the economy. The central bank has the tools available to provide additional “monetary loosening” should the economy continue to deteriorate, Chief Economist Spencer Dale said in an interview with the Daily Mail published on Sept. 29. At the same time, accelerating inflation means a resumption is not a “no brainer,” he said. U.K. inflation accelerated in August, with consumer prices increasing 4.5 percent from a year earlier, compared with 4.4 percent in July, the Office for National Statistics said on Sept. 13. The central bank’s next decision on interest rates and its bond-purchase program will be on Oct. 6. Policy makers will keep the benchmark rate at an all-time low of 0.5 percent, according to all 53 economists surveyed by Bloomberg. The asset-buying plan will stay at 200 billion pounds, the median estimate of a separate survey showed. ‘Buying Into Gilts’ “QE is coming back, possibly this week but almost certainly by next month,” said John Wraith, a fixed-income strategist at Bank of America Corp.’s Merrill Lynch unit in London. “With QE highly likely people are buying into gilts. The more fundamental flow is also coming from risk aversion to do with the euro-zone debt crisis. People want a safe place to put their money and gilts are a beneficiary of that trade.” Sterling fell 2.9 percent against the dollar in the third quarter as signs of sputtering economic growth and prospects for more QE curbed weighed on the currency. Gilts returned 8.9 percent in the period, the best quarterly performance since the fourth quarter of 2008 following the collapse of Lehman Brothers Holdings Inc., according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. U.K. house prices fell for a fifth month in September and the pace of decline may increase in coming months, property researcher Hometrack Ltd. said in a report today. The average cost of a home slipped 0.1 percent from August and was down 3.5 percent from a year earlier, the company said. To contact the reporter on this story: Garth Theunissen in London at gtheunissen@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Source