Wednesday, February 16, 2011

Pound Slumps, Gilts Rally After King Damps Expectations of Early Rate Rise

By Garth Theunissen - Feb 16, 2011 10:21 PM GMT+0800

The pound slumped and government bonds surged as investors pared their bets on higherinterest rates after Bank of England Governor Mervyn King said borrowing costs may need to stay at a record low to revive the economy.
Sterling depreciated against all of its 16 most-actively traded peers and government bond yields sank. The central bank hasn’t laid the ground for an interest-rate increase, King told reporters inLondon today following the release of the quarterly inflation report. Inflation in the U.K. may peak at about 4.4 percent this year before reaching the central bank’s 2 percent target by the middle of 2012, the report said.
“The market has gotten it into its head that there would be three, maybe four interest rate hikes by the end of the year, but that’s too excessive,” said Neil Mellor, a London-based currency strategist at BNY Mellon. “There is clearly a fear that there will be downside risks to the economy.”
The pound fell 0.7 percent to $1.6007 at 2:18 p.m. in London, following earlier gains of as much as 0.4 percent. Sterling weakened 0.6 percent versus the euro to 84.15 pence.
The Bank of England has faced mounting pressure to raise interest rates from a record low of 0.5 percent after inflation exceeded its target for more than a year. A report yesterday showed consumer prices jumped 4 percent in January from a year earlier, forcing King to write another letter to Chancellor of the Exchequer George Osborne to explain why it remains above the 3 percent upper limit.
“Some people are running ahead of themselves in saying that we are pre-announcing, or we’re laying the ground, for a rate rise,” King said today after the inflation report was released. “That decision has not been taken and it won’t be taken until we get to the next meeting, or the following meeting” and “it may be many quarters before we do anything.”

‘Listen to King’

Short-sterling futures rose today, reducing the implied yield on the contract expiring in December by seven basis points to 1.69 percent. A lower yield indicates investors reduced bets that policy makers will increase borrowing costs.
“People are clipping away their expectations for higher rates,” said Mellor. “You’ve got to listen to King. The market has focused too much on the inflation figures and too little on what Mervyn King has been saying.”
The growth outlook has worsened because of a “weak” fourth quarter, the central bank said today. King yesterday dismissed the inflation spurt as temporary, saying raising rates quickly to tame the surge may hurt the economy, according to his letter to Osborne.
The U.K. government bonds rallied, pushing the yield on the two-year note down by six basis points to 1.49 percent. The 4.5 percent security due March 2013 rose 0.11, or 1.1 pounds per 1,000 pound face amount, to 106.055. Ten-year gilt yields slid six basis points to 3.80 percent.
To contact the reporter on this story: Garth Theunissen in London
To contact the editor responsible for this story: Daniel Tilles at



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