British Pound Advances Against Euro Before Inflation Reports

The pound strengthened against the euro before reports this week that may show inflation is gathering pace, reinforcing speculation that the Bank of England will raise interest rates this year to curb price growth.

Sterling appreciated against 11 of its 16 most-actively traded peers. Consumer prices probably rose 4 percent from a year earlier last month after gaining 3.7 percent in December, the fastest pace since November 2008, according to the median forecast of 30 economists polled by Bloomberg. The Office for National Statistics in London releases the inflation data tomorrow, while the central bank publishes its quarterly inflation report on Feb. 16.

“The pound remains resilient because the market is fearful of rate hikes coming sooner rather than later as a result of inflationary pressures,” said Adam McCormack, head of gilt sales at Barclays Plc in London.

The pound gained 0.7 percent to 84.03 pence per euro, its strongest intraday level since Feb. 7, before trading at 84.09 by 12:05 p.m. in London. Sterling lost less than 0.1 percent against the dollar to $1.5997.

Britain’s currency has gained 2.6 percent against the dollar and 1.9 percent versus the euro this year as speculation intensified that the central bank will need to raise borrowing costs for the first time since July 2007 to curb inflation.

Consumer price growth has exceeded the central bank’s 2 percent limit for more than a year, accelerating to 3.7 percent in December, equaling an April reading that was the highest since November 2008.

Record Low

Short-sterling futures were unchanged, with the implied yield on the contract expiring in December steady at 1.71 percent. A lower yield would indicate investors are reducing bets that policy makers will increase borrowing costs.

Policy makers left their key rate at a record low 0.5 percent last week and maintained the central bank’s bond- purchase plan at 200 billion pounds ($320 billion). The bank’s decision was based on new quarterly economic forecasts, which will be presented by Governor Mervyn King on Feb. 16.

Business Secretary Vince Cable said he shares the view of the “doves” on the Bank of England’s Monetary Policy Committee, saying a rate increase would be “potentially very difficult” in the U.K.’s current economic climate, according to a Bloomberg Television interview airing today.

The yield on the 10-year gilt fell two basis points to 3.85 percent. The 4.75 percent security due March 2020 rose 0.15, or 1.5 pounds per 1,000 pound face amount to 106.84. Two-year gilt yields dropped four basis points to 1.52 percent.

The U.K. 10-year breakeven rate, an indication of investors’ inflation expectations over the life of the securities, derived from the yield gap between conventional and index-linked bonds, was unchanged at 3.24 percent.

Bloomberg

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