Pound Rises Against Dollar After Bank of England Rate Comments

By Lukanyo Mnyanda

Nov. 19 (Bloomberg) -- The pound rose against the dollar and the euro as the Bank of England indicated it’s prepared again to cut interest rates, now at the lowest level since 1955, to revive the economy.

“There’s a sense they’re ready to be more aggressive in addressing the economic problems, and the market appears to be taking that as a positive step,” said Russell Jones, head of global fixed-income and currency research in London at RBC Capital Markets. “It remains uncertain whether this will be sustained. There’re a lot of problems to be worked out.”

Bank of England policy makers, led by Governor Mervyn King, considered a bigger reduction in the benchmark interest rate than the 1.5 percentage points announced Nov. 6, according to the minutes of their meeting preceding that decision.

The pound was at $1.5053 as of 11:30 a.m. in London, from $1.4958 yesterday. The U.K. currency is down 24 percent against the dollar this year. Against the euro, it climbed to 83.81 pence, from 84.35 pence, reducing its decline this year to 13 percent. It reached a record low of 86.63 pence last week. Investors should use gains by the pound as an opportunity to sell the currency, Jones said, without providing a forecast.

The Bank of England discussed the need for a reduction to less than 2.5 percent, before the monetary policy committee voted 9-0 to lower the rate to 3 percent, according to the minutes, released today.

Policy makers limited the reduction to 1.5 percentage points because they wanted to wait for details of government tax plans and see the effects of the state rescue of financial institutions.

The European Central Bank, headed by Jean-Claude Trichet, cut its main rate half a point to 3.25 percent this month, pushing it below the Bank of England’s for the first time since the euro’s debut in 1999.

“Most of the bad news has already come out and the currency should consolidate,” said Roberto Mialich, a Milan- based currency strategist at Unicredit Markets & Investment Banking. “The dovish inflation outlook has prompted the markets to price in more aggressive rate cuts from the Bank of England.”

The implied yield on the short-sterling December futures contract fell 6 basis points to 3.39 percent today, pushing its decline since Oct. 31 to 82 basis points. The equivalent rate in euros was 3.48 percent, a drop of 19 basis points this month.

U.K. government bonds rose, with the yield on the two-year note dropping five basis points to 2.05 percent. The 4.75 percent security due June 2010 advanced 0.07, or 70 pence per 1,000 pound face amount, to 104.09. The 10-year yield slipped five basis points to 4.03 percent. Yields move inversely to bond prices.

The difference in yield between the two-year and the 10- year gilt was 198 basis points, near the widest since 1993. The spread was 179 basis points a week ago. Investors are favoring shorter-dated notes, which are more sensitive to the outlook for interest rates, on speculation the Bank of England will keep cutting the benchmark rate.

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