Pound Climbs as BOE's Dale Joins Sentance, Weale in Seeking Rate Increase

Pound Gains as BOE’s Dale Joins Camp Calling for Rate Increase

Feb. 23 (Bloomberg) -- The pound rallied to an almost three-week high against the dollar and gilts fell after minutes of the Bank of England’s meeting this month showed a third policy maker voted to raise interest rates to curb inflation.

Sterling extended its advance this year against a basket of nine developed-market peers to 3.1 percent as measured by Bloomberg Correlation-Weighted Currency Indexes, and traders increased bets that borrowing costs will climb. Central bank policy maker Spencer Dale joined Andrew Sentance and Martin Weale in voting to boost rates, according to minutes from the Feb. 10 meeting published today in London.

“This growing momentum in the BOE in favor of higher rates is supporting” the pound versus the dollar, said Elizabeth Gregory, a Geneva-based market strategist at ACM Advanced Currency Markets, which handles about $150 billion of currency trades a month. “That trend could continue for the next six months to a year.”

The pound appreciated as much as 0.9 percent to $1.6274, the highest since Feb. 3, before trading 0.6 percent stronger at $1.6239 as of 11:36 a.m. in London. The U.K. currency was little changed at 84.60 pence per euro.

Calls to lift borrowing costs for the first time since July 2007 are intensifying as inflation has remained above the central bank’s 2 percent target for more than a year. Consumer- price growth accelerated to 4 percent last month, a Feb. 15 report showed. Dale and Weale voted for a 25 basis-point increase in the main rate, from a record low 0.5 percent, while Sentance voted for 50 basis points, the minutes today showed.

Hawkishness Increasing

“People weren’t really expecting Sentance be so aggressive,” Gregory said.

Of the five members of the Monetary Policy Committee that voted for no increase in the benchmark rate “some thought that the case for an increase had nevertheless grown in strength,” according to the minutes. Governor Mervyn King said at a press conference last week that market expectations of higher borrowing costs were overdone.

Two-year notes fell for a second day, lifting yields by three basis points to 1.53 percent. They rose to 1.56 percent, the highest in more than a week. The 4.5 percent security due March 2013 fell 0.08, or 80 pence per 1,000-pound ($1,625) face amount, to 105.91. Ten-year yields, typically less sensitive to short-term rate market expectations, gained two basis points to 3.70 percent.

Gilts have declined this year amid mounting speculation that rates will increase. U.K. debt lost investors 1.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds fell 1.2 percent, with U.S. Treasuries down 0.4 percent.

Short Sterling

Money markets signal policy makers will probably raise the key rate by about 75 basis points by year-end, according to the Sterling overnight interbank average, Tullett Prebon Plc data show. The so-called Sonia rate indicates an increase of about 25 basis points in May, with another quarter point by September.

The implied yield on the December short-sterling futures contract jumped five basis points to 1.78 percent. It rose to 1.82 percent, the highest this year, as traders added to bets that U.K. borrowing costs will rise. The yield was 1.25 percent at the end of last year.

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