U.K. Pound Slips Against Dollar, Euro on Outlook for Inflation

By Andrew MacAskill

Sept. 16 (Bloomberg) -- The U.K. pound fell by the most in two weeks against the dollar after Bank of England Governor Mervyn King said inflation will peak 'soon' and then slow 'sharply' in 2009, boosting speculation of an interest-rate cut.

The pound also snapped an eight-day gain versus the euro as King said in a letter today to Chancellor of the Exchequer Alistair Darling that price-growth in Europe's second-largest economy will peak at about 5 percent. The governor was required to explain why inflation exceeded the government's target after the statistics office today said consumer prices jumped an annual 4.7 percent in August, the most since records began in 1997.

``The market is reading that inflation is going to come down and this will allow the Bank of England to cut interest rates,'' said Chris Turner, head of currency research in London at ING Groep NV. ``This is being perceived as sterling negative and we are going to see it start coming off.''

The British currency fell as much as 1.2 percent to $1.7796, and was at $1.7803 by noon in London, from $1.8007 yesterday. Against the euro, the pound slipped to 79.66 pence, from 79.16 pence, after gaining 3 percent in the previous eight days.

King said the balance between the risks of slower growth and inflation remained 'finely balanced'. The bank will ``assess how the balance of risks is evolving at its next and subsequent meetings,'' he said in his letter.

Under the terms of the Bank of England's mandate, King is obliged to write a letter of explanation to Darling if inflation breaches its 2 percent target by more than one percentage point and stays there after three months.

U.K. policy makers have kept the main rate at 5 percent since April on concern inflation will become embedded in the economy. They are scheduled to release the minutes of their last meeting tomorrow.

The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partner, fell to 86.68, according to Deutsche Bank AG. The measure is down 8.4 percent this year.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net