U.K. Pound Falls Versus Euro, Australian Dollar on Bets Inflation Slowing

The pound fell against the euro and the yield difference between two- and 10-year gilts was at its narrowest in nearly three years as a report showed U.K. price growth accelerated at the slowest pace in six months.

Thirty-year yields declined to a record low and sterling snapped two days of gains as the annual inflation rate fell to 4.2 percent from 4.8 percent in November, adding to speculation that easing price pressure may convince the Bank of England to loosen monetary policy further by expanding its so-called quantitative-easing program.

“The market seems to be raising bets that the Bank of England will expand its quantitative-easing program next month to support the economy, and a weaker inflation number will bolster that view,” said Geoffrey Yu, a currency strategist at UBS AG in London. “More liquidity in the market will keep pressure on the pound.”

The pound declined 0.4 percent to 83 pence per euro at 5:03 p.m. London time, after rising 1.1 percent over the previous two days. The currency slid 0.6 percent to A$1.4767 after falling to A$1.4713, the weakest since February 1985. Sterling strengthened 0.2 percent to $1.5348.

The two-year gilt yield rose one basis point, or 0.01 percentage point, to 0.40 percent. The 2.25 percent note due in March 2014 fell 0.03, or 30 pence per 1,000-pound ($1,538) face amount, to 103.925. The 10-year yield was little changed at 1.96 percent.

Spanish Auction

The pound extended its drop against the euro after Spain sold 12-month bills at an average yield of 2.049 percent, down from 4.05 percent at the previous auction on Dec. 13. The rate for its 18-month bills dropped to 2.399 percent from 4.226 percent last month.

The MSCI World Index of shares climbed 1 percent, and the FTSE 100 Index of shares added 0.7 percent.

The pound declined 1.2 percent against nine developed- nation currencies this year, making it the worst performer after the euro, according to Bloomberg Correlation-Weighted Currency Indices.

The difference in yield between two- and 10-year notes narrowed to 156 basis points, the least since March 2009, according to closing prices. Longer-maturity bonds are more influenced by the outlook for inflation than shorter-dated ones.

Gilts returned 0.5 percent this year through yesterday, compared with a gain of 0.4 percent for German government bonds and 0.2 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Slowing Inflation

U.K. consumer-price gains slowed to an annual 4.2 percent compared with 4.8 percent in November and a peak of 5.2 percent in September, the Office for National Statistics said in London. It was the biggest drop in the inflation rate since April 2009, the depth of the last recession.

The Bank of England kept its asset-purchase program, known as quantitative easing, at 275 billion pounds on Jan. 12 and left its main interest rate at a record low 0.5 percent to help spur faltering economic growth.

Two-year note yields, which fell to a record low 0.27 percent on Dec. 30, will rise to 0.82 percent by year-end and 10-year yields will climb to 2.72 percent, according to analyst forecasts compiled by Bloomberg.

“The yields where they are now don’t reflect the real economy, but they reflect the fact that the U.K. is seen as a safe haven and also all the quantitative easing being done,” said Luke Hickmore, an investment manager at Scottish Widows Investment Partnership in Edinburgh. “In the longer-term, as these things start washing out, the yield won’t be 2 percent. It will be more like 3 or 4 percent at least.”

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net