Pound falls as UK keeps rates low

The pound posted a fourth weekly decline against the dollar amid speculation the Bank of England will keep interest rates at a record low to counter faltering growth. The British currency fell against the euro for the first time in three weeks as European Union leaders pledged to stabilise the euro-area economy and stave off a Greek debt default as long as the country sticks to budget cuts. Minutes from the Bank of England's last meeting, released on June 22, showed officials voted 7-2 to hold interest rates at 0.5 per cent, while some members foresaw the need for more bond purchases. "The pound is likely to remain weak in the near term as economic data disappoints and because of speculation about another round of quantitative easing," said Jane Foley, a senior currency strategist at Rabobank International in London. The pound dropped 1.3 per cent from the previous week to $1.5985 (Dh5.87) in London on Friday. Sterling weakened 0.4 per cent to 88.76 pence per euro and declined 0.9 per cent to 128.41 yen. The British currency fell 7.1 per cent in the past 12 months, making it the third worst performer among 10 major economy currencies after the US and Canadian dollars, according to Bloomberg Correlation-Weighted Currency Indexes. Gilts rose from the previous week, pushing 10-year yields down seven basis points to 3.13 per cent. Two-year note yields dropped eight basis points in the week to 0.69 per cent. The pound declined after Bank of England Governor Mervyn King said on Friday the euro-area debt crisis poses the biggest risk to the stability of the UK financial system. The comments echo those of the European Central Bank President Jean-Claude Trichet, who said on June 23 that the most serious threat to financial stability in the European Union stems from the mounting debt crisis. Investors pushed back bets that the Bank of England will increase interest rates to beyond May 2012, according to forward contracts on the sterling overnight interbank average, Tullett Prebon Plc data show. As recently as April, traders were betting on an increase in May 2011. A UK retail-sales index fell to its weakest level in a year this month as Britons curtailed spending on groceries and clothing, the Confederation of British Industry said on June 23. The 10-year breakeven rate fell eight basis points from the previous week to 3.04 percentage points. The rate, a market gauge of inflation expectations, is derived from a yield gap between regular and index-linked bonds. From / Gulf News