British Pound Rises, Set for Weekly Gains Against Dollar, Euro

By Lukanyo Mnyanda

Nov. 21 (Bloomberg) -- The pound climbed against the dollar and the euro, headed for weekly gains against both, amid speculation slowing inflation will give U.K. policy makers scope to accelerate the pace of interest-rate reductions.

The Bank of England signaled two days ago it's prepared to cut borrowing costs further after lowering its main rate 1.5 percentage points to 3 percent, the lowest level since 1955. Consumer prices rose 4.5 percent last month, down from 5.2 percent the month before and below economist estimates, the government said this week. The U.K. currency dropped yesterday and bonds surged after a report showed retail sales fell a second month.

``There is still some room for the monetary policy committee to move on rates and it appears they are also not overly concerned about the currency for now,'' a team of analysts at UBS AG, led by Mansoor Mohi-Uddin in Zurich, said yesterday in a research report.

The pound rose to $1.4858 as of 7:14 a.m. in London, from $1.4727 yesterday and $1.4740 at the end of last week. Against the euro, the U.K. currency strengthened to 84.27 pence, from 84.56 pence and 85.41 pence on Nov. 14.

The currency declined the most in a week versus the euro yesterday as the Office for National Statistics said retail sales shrank 0.1 percent last month. It also dropped versus the yen as an increase in U.S. initial jobless claims prompted bets investors will sell higher-yielding assets.

Rate Cuts

Central banks worldwide are discussing deeper reductions in rates as economies founder. Federal Reserve policy makers predicted the U.S. will contract through mid-2009, with some prepared to cut rates further, a record of their latest meeting showed two days ago. The Swiss National Bank unexpectedly cut its key rate 100 basis points to 1 percent yesterday.

The Bank of England, led by Governor Mervyn King, considered a bigger reduction in the benchmark rate than the 1.5 percentage points announced Nov. 6, according to minutes of its meeting released this week. Policy makers discussed the need for a cut to less than 2.5 percent, the minutes showed.

The yield on the 10-year gilt sank 15 basis points yesterday to 3.89 percent, falling below 4 percent for the first time in almost three years. The 5 percent security due March 2018 advanced 1.24, or 12.4 pounds per 1,000-pound ($1,486) face amount, to 108.59. The yield on the two-year note decreased 15 basis points to 2 percent, dropping to the lowest level in at least 16 years. Yields move inversely to bond prices.

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