Pound Rises Against Dollar, Euro as Bank of England Holds Rate

By Lukanyo Mnyanda

Sept. 4 (Bloomberg) -- The pound rose, rebounding from near the lowest level in 2 1/2 years against the dollar, after the Bank of England kept its main interest rate unchanged.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, held the benchmark rate at 5 percent, matching the forecast of all 61 economists surveyed by Bloomberg, as it seeks to balance the risk of a recession with the fastest inflation in more than a decade. The pound rose against the euro after the European Central Bank also kept interest rates unchanged and its president, Jean-Claude Trichet, said the region is undergoing an ``episode of weak activity.''

``They're not willing to ease monetary policy yet given the elevated levels of inflation,'' said Lee Hardman, a currency strategist in London at the Bank of Tokyo-Mitsubishi Ltd. ``The pound got an initial boost, but we're still looking for it to trend lower.''

The pound was at $1.7817 by 2:38 p.m. in London, from $1.7768 yesterday, when it fell as much as 1 percent to $1.7668, the lowest level in almost 2 1/2 years. It was at 81.23 pence per euro, from 81.60 yesterday. Earlier, it slipped to 81.88 pence, the weakest level since the single European currency debuted in 1999.

The pound's trade-weighted index, a broader gauge of the currency's performance against Britain's major trade partners, rose for the first time since Aug. 15, climbing to 85.22, from 84.99, according to Deutsche Bank AG. The measure slid to the lowest level since at least 2000 yesterday.

Deepening Slowdown

Before today, the pound fell for seven days as reports showing the economic slowdown is deepening prompted investors to reduce bets the central bank will cut rates. House prices declined for a fifth month, HBOS Plc said today. The pound is still 8.5 percent lower against the dollar in the past month, the second-worst performance of the 16 most actively-traded currencies. It has fallen 2.9 percent versus the euro.

The currency's slide accelerated after Chancellor of the Exchequer Alistair Darling told the Guardian newspaper on Aug. 30 the U.K. faces its biggest economic slowdown in 60 years. He later said he was referring to the world economy.

``If you've made money shorting the pound, it's probably a good idea to make sure your profit isn't eaten away,'' said Divyang Shah, chief strategist in London at CBA Europe Ltd., a unit of Commonwealth Bank of Australia. A short position is a bet the price of an asset or currency will drop.

Britain's central bank is seeking to bring inflation, which accelerated to 4.4 percent in July, below its 2 percent target. It has cut the benchmark rate three times since the end of November.

House Prices Slip

Government bonds were little changed, with the 10-year yield at 4.49 percent. The price of the 5 percent security due March 2018 fell 0.02, or 20 pence per 1,000-pound face amount, to 103.88. The yield on the two-year note was at 4.41 percent. Yields move inversely to bond prices.

The pound pared gains after HBOS said British house prices fell a more-than-expected 10.9 percent in August, further evidence of the nation's worst housing slump since the early 1990s. Prices were forecast to decline 10.7 percent, according to the median forecast of 13 economists surveyed by Bloomberg.

``Sterling is still in over-valued territory,'' David Bloom, the London-based global head of currency strategy at HSBC Plc, Europe's biggest bank by market value, said in an interview on Bloomberg Television. ``Everyone is expecting rates to come down and the economy is in a terrible position.''

Traders have increased bets the Bank of England will cut rates. The implied yield on the March short-sterling futures contract dropped 12 basis points since the end of August to 5.07 percent today.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net