Pound Falls as U.K. Inflation Accelerates

The U.K. pound dropped the most in two weeks against the euro as traders pared bets that the Bank of England will increase interest rates on speculation worsening inflation will stifle economic growth.

The currency also snapped two days of gains versus the dollar after a government report showed inflation last month reached the fastest pace in at least a decade, prompting central bank Governor Mervyn King to say the direction of interest rates is ``uncertain.'' Two-year government bonds rose the most in more than two months.

The pound dropped 0.7 percent to 79.42 pence per euro at 3:20 p.m. in London, from 0.7883 yesterday, the biggest decline since June 2. The currency fell 0.6 percent to $1.9508, from $1.9632.

Consumer prices climbed 3.3 percent in May from a year earlier, the most since at least 1997, the Office for National Statistics said today in London. The increase compelled King, as required by law, to write a letter to Chancellor of the Exchequer Alistair Darling explaining why the rate strayed more than a percentage point from the 2 percent target.

Inflation ``is likely to remain markedly above the target until well into 2009,'' King said in the letter, released by the central bank today in London. ``The committee will maintain price stability by ensuring that the rise in inflation is temporary.'' The ``path of bank rate that will be necessary to meet the 2 percent target is uncertain,'' he wrote. The letter is the second to be written since the bank was made independent in 1997.

The U.K. currency has slumped 15 percent against the euro since Sept. 14, when the central bank provided emergency funding to Northern Rock Plc after the first run on a U.K. bank in more than a century. Inflation has since accelerated while growth has sputtered amid a slump in house prices.

Pound Falls as U.K. Inflation Accelerates

TradingEconomics.com, Bloomberg
6/17/2008 9:48:11 AM