U.K. Pound Advances After Sentance Underscores Inflation Focus

By Andrew MacAskill and Lukanyo Mnyanda

Sept. 25 (Bloomberg) -- The pound rose to its highest level in a month versus the dollar after Bank of England policy maker Andrew Sentance said the central bank must temper its response to the financial crisis and stick to the inflation mandate.

The British currency also rose against the euro and the yen. Policy makers should guard against ``allowing the economic slowdown to develop into a deflationary spiral which would not be consistent with our mandate to meet the 2 percent inflation target,'' Sentance said in a speech late yesterday.

``There has to have been a shift in thinking within the BOE, or at least a heightened resistance, towards moving to a more dovish stance,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``This should keep sterling reasonably well supported.''

The pound climbed to $1.8589 as of 9:26 a.m. in London, the highest level since Aug. 22, from $1.8546 yesterday. It traded at 79.16 pence per euro, from 79.21, and 196.67 yen, from 195.93. The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partners, rose 0.2 percent to 87.85, according to Deutsche Bank AG.

The implied yield on the short-sterling futures contract due in March rose 7 basis points today to 5.40 percent, from 5.24 percent at the end of last week. The odds of the central bank cutting rates in October dropped 10 percent, according to a Credit Suisse derivatives index.

Inflation accelerated to 4.7 percent in August after oil prices rose to a record this year. Sentance reiterated Bank of England Governor Mervyn King's remark that 80 percent of price gains since December are accounted for by food, gasoline and utility bills.

Blanchflower Vote

Policy makers kept the rate unchanged on Sept. 4 as they weighed the risks of accelerating inflation against the danger that mounting bank losses will push Europe's second-biggest economy into its first recession since 1991. Of the nine policy makers, only David Blanchflower voted for a cut last month.

The pound has advanced 2.3 percent versus the dollar this week as Congress stalls a $700 billion plan to restore stability in the financial markets.

``The longer the delays over the bailout, then the more the dollar will continue to edge lower and we could see sterling stage a modest rally,'' said Paul Robson, a London-based currency strategist at the Royal Bank of Scotland Group Plc.

U.K. gilts declined, with the yield on the 10-year note rising 4 basis points to 4.61 percent. The 5 percent security due March 2018 gained 0.30, or 3 pounds per 1,000-pound ($1,861) face amount, to 102.99. The yield on the two-year note climbed 4 basis points to 4.29 percent.

``We are seeing a downward trend in gilts,'' said David Keeble, London-based head of fixed-income strategy at Calyon, the investment-banking unit of Credit Agricole SA. ``Andrew Sentance has been trying to crush any imminent expectations of a rate cut.''

The U.K.'s Debt Management Office is scheduled today to auction 2.5 billion pounds of 4.5 percent bonds maturing in 2019.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.netLukanyo Mnyanda in London at lmnyanda@bloomberg.net;