Pound Will Gain 10% Against Dollar on Inflation, Barclays Says

By Candice Zachariahs

Aug. 7 (Bloomberg) -- The pound will rise 10 percent versus the dollar over six months as the Bank of England’s decision to add more funds to the economy now means it will have to adopt a tighter monetary policy later, Barclays Capital said.

The U.K. currency will also strengthen against the euro as quickening inflation spurs policy makers to move toward raising interest rates next year, said Paul Robinson, a currency strategist at Barclays in London. Central bank Governor Mervyn King yesterday kept the benchmark lending rate at a record low of 0.5 percent and said the BOE will increase asset purchases by 50 billion pounds ($83.9 billion) to spur growth.

“The more policy easing there is, the quicker the economy is likely to grow and the sooner it will need to be tightened,” Robinson wrote in a note yesterday. The BOE’s “decision coupled with the positive news we have had on forward-looking prospects in both the U.K. and global economies, makes an earlier and more aggressive tightening of policy more likely.”

The pound traded at $1.6788 as of 10:26 a.m. in Tokyo, after weakening 1.2 percent yesterday, the biggest decline since June 3. The currency rose to $1.7043 on Aug. 5, the highest level since Oct. 21. Against the euro, the British currency was at 85.57 pence.

Sterling has been the third-best performer against the dollar and euro in the past three months among the 16 major currencies on optimism the U.K. is recovering from its deepest recession since World War II.

The pound will advance to $1.86 in six months and $1.88 in a year, Barclays forecasts, increasing its earlier estimates from $1.80 for both periods. The currency will climb to 78 pence per euro in six months and trade at 80 pence in a year, the bank said, revising its previous predictions of 80 pence and 83 pence.

Actual tightening of monetary-policy is not likely to happen during the fourth quarter of this year “but it may be clearly on its way by then,” Robinson said

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.