The pound fell below $2 for the first time in seven weeks after U.K. inflation slowed more than forecast last month, reducing the chances of another interest- rate increase. Britain’s currency also slipped versus the euro as investors pared holdings of riskier assets because of the turmoil in the credit market. Data today showed consumer prices grew 1.9 percent in July, the first time the inflation rate has dropped below the Bank of England’s 2 percent ceiling since March 2006.
The inflation report “will cast some doubt on the tightening cycle,” said Steve Pearson, chief currency strategist at HBOS Treasury Services Plc in London. “We are looking for a delay until the next rate increase, if at all. The unwinding of carry trade positions is weighing on sterling too.”
Against the dollar, the pound slumped to $1.9981, the first time it’s traded below $2 since June 28, and was at $2.0003 by 4:37 p.m. in London, from $2.0125 yesterday. It also declined to 67.89 pence per euro, from 67.64 pence.
U.K. government bonds rose as traders pared expectations of further interest-rate increases this year. The yield on the 4 percent gilt due March 2009 dropped 8 basis points to 5.48 percent. Yields move inversely to bond prices.
The slowing of inflation ends a 14-month period when consumer-price growth exceeded the bank’s 2 percent goal, reaching a decade-high in March as growth picked up. Today’s report may lessen the need for the central bank to deliver a sixth rate increase signaled in its forecasts last week.
Rush for Dollars
The U.K. currency also dropped as the global credit crunch set off a worldwide rush for dollars as banks and fund managers scramble to pay back loans used to buy risky mortgage securities.
The dollar has rallied 1.8 percent against the pound in the last four days, after a five-year tumble that took the U.S. currency to its lowest level in a decade.
The pound was also hurt after a survey from the Royal Institution of Chartered Surveyors showed expectations for U.K. house prices fell to the lowest since 2005 last month.
The number of real-estate agents and surveyors saying they expect prices to drop over the next three months outnumbered those forecasting gains by 9 percentage points from 0.7 percentage point in June, London-based RICS said. That’s the most pessimistic reading since June 2005.
The Bank of England’s benchmark rate of 5.75 percent is the highest among the Group of Seven countries and the BOE signaled in its quarterly inflation report Aug. 8 it may increase borrowing costs further. The central bank will also release the minutes of its Aug. 2 rate-setting meeting tomorrow.
Futures trading shows investors reduced expectations that the BOE will raise borrowing costs this year. The implied yield on the December interest-rate futures contract dropped 3 basis points to 6.10 percent.
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