Pound strengthens on inflation data

The pound strengthened against the euro after a report showed UK inflation accelerated more than forecast last month, reducing the likelihood that the central bank may inject further monetary stimulus to the economy.

Consumer price inflation accelerated to an annual 4.4 per cent in July, from 4.2 per cent the previous month, the Office for National Statistics said in London today.

Economists had predicted a 4.3 per cent reading, according to the median estimate in a Bloomberg survey. Bank of England Governor Mervyn King maintained inflation would fall below target as global financial turmoil hurts growth.

"Raising rates just doesn't make sense in this economic environment but I doubt very much that there will be further quantitative easing," said Mike Berg, a foreign exchange strategist at 4Cast Ltd. in London. "Central banks across the world are at a loss as to how to stimulate economic growth without letting inflation get out of hand. Sterling remains trapped."

The pound gained 0.5 per cent against the euro to 87.73 pence as of 11.48am in London. It was little changed at $1.6379, paring an earlier 0.4 per cent decline. Sterling lost 0.1 per cent to 125.77 yen.

Investors are betting the Bank of England won't raise borrowing costs until after July next year, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average, or Sonia, show. As recently as February, the data indicated traders were betting on a rate increase this May.

Mr King said inflation could fall below target.

"Recent developments in world stock markets and in the euro area are of particular concern," Mr King said in a letter to chancellor of the Exchequer George Osborne after inflation kept above the central bank's 3 per cent ceiling. There is a risk of "severe stress and dislocation in financial markets and, were this risk to crystallise, it would have a significant impact on the UK economy."

The central bank will tomorrow publish minutes of its August 3rd-4th policy meeting, when it left its benchmark interest rate on hold at 0.5 per cent.

The 10-year gilt yield was two basis points lower at 2.52 per cent. Two-year yields declined five basis points to 0.62 per cent.

Mr Osborne said on August 11th that the UK's recovery will "take longer and be harder," while Mr King signalled a day earlier that he may resume pumping cash into the economy to boost growth.

Britain's economy will expand 1.2 per cent this year, compared with a projected
3.4 per cent in Germany and a 1.8 per cent increase in the US, Bloomberg surveys show.

Bloomberg