The pound declined, dropping to a 10-week low versus the euro, after minutes of this month’s Bank of England meeting showed two policy makers wanted a larger increase in asset purchases than the amount finally agreed.
Sterling fell against all but one of its 16 major peers and gilts gained as the minutes revealedAdam Posen and David Miles voted for a 75 billion-pound ($117.6 billion) boost in quantitative easing, instead of the 50 billion pounds supported by the other seven policy makers. Gilts also rose before a report this week forecast to confirm the U.K. economy contracted in the fourth quarter, boosting demand for safer assets.
“The minutes are a dovish surprise,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The market was moving to reduce the scope for further quantitative easing, which was supporting the pound, and that’s now being seen as incorrect because two members voted for bigger bond purchases. We see further downside for the pound.”
Sterling declined 0.7 percent to 84.49 pence per euro at 4:34 p.m. London time after falling to 84.57 pence, the weakest level since Dec. 13. The U.K. currency slid 0.6 percent to $1.5678, and was little changed at 125.88 yen.
Posen and Miles voted for the additional stimulus because of “the considerable margin of spare capacity remaining in the economy and the extent of deleveraging still likely to be required,” the minutes of the Feb. 8-9 meeting showed. They also saw a risk of a “prolonged period of depressed demand causing inflation to fall materially below” the central bank’s 2 percent target.
Record Low
The nine members of the Monetary Policy Committee were unanimous in agreeing to keepinterest rates at a record low 0.5 percent. Bank of England Deputy Governor Charlie Bean said late yesterday in Glasgow, Scotland, that while inflation is easing and some recent business surveys have been encouraging, growth will be “sluggish” in the first half of 2012.
The minutes have “brought the possibility of further quantitative easing in May back into play,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “It acts as yet another reminder that, despite the good start to 2012, this year might not be a runaway success for sterling.”
The pound has dropped 0.6 percent in the past week according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. That extends this year’s loss to 1.8 percent, the indexes show.
Gilts Rise
The yield on the benchmark 10-year gilt declined 11 basis points to 2.11 percent, the biggest drop since Feb. 10. The 3.75 percent bond due in September 2021 rose 1.025, or 10.25 pounds per 1,000-pound face amount, to 114.13. Two-year yields fell six basis points to 0.39 percent.
The U.K. economy contracted 0.2 percent in the fourth quarter, confirming the initial numbers released on Jan. 25, according to a Bloomberg News survey before the government releases the data on Feb. 24.
Gilts have handed investors a 2.3 percent loss this year, after returning almost 17 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
