U.K. Pound Falls Against Dollar


The pound fell against the dollar and euro after accelerating inflation prevented the Bank of England from cutting interest rates to support the economy.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, held its main rate at 5 percent today as forecast in a Bloomberg News survey, even amid evidence a property market-led slowdown is worsening. Britain's currency also fell after HBOS Plc, the country's biggest mortgage lender, said house prices dropped the most in 15 years in May.

The pound dropped to $1.9462, the lowest level since May 19, and was at $1.9490 by 2:08 p.m. in London, from $1.9556 yesterday. It also fell to 79.27 pence per euro, from 78.94 pence.

The U.K. central bank's rate-setting committee didn't publish a statement after today's decision. Policy makers voted 8 to 1 to keep rates on hold at last month's meeting as record-high oil prices and spiraling food costs stoked inflation. Consumer- price growth has held above the bank's 2 percent target for the seven months through April, government data show.

Britain's currency dropped versus the euro after ECB President Jean-Claude Trichet said in Frankfurt today the region's main rate may be increased next month as risks to price stability ``have increased further.''

U.K. policy makers last cut borrowing costs in April to try and prevent a slowdown in the real-estate market and a credit squeeze from harming the wider economy.

U.K. government debt may reverse its declines on speculation a waning economy will force the central bank to lower borrowing costs later in the year. The implied yield on the December sterling interest-rate futures contract fell to 5.93 percent, from 6.07 percent a week ago, as traders added to bets on a rate cut by year-end.

The pound has fallen against 14 of the 16 most-traded currencies since Dec. 6, when the Bank of England started lowering its main rate, from a 6 1/2-year high of 5.75 percent. It has dropped 10 percent versus the euro and 4 percent against the dollar in that time.

The ECB has held its main rate at a more than six-year high of 4 percent since June, while the Federal Reserve has lowered its target rate for overnight loans between banks seven times since September, to 2 percent.


TradingEconomics.com, Bloomberg
6/5/2008 6:54:40 AM