The U.K. pound fell against the dollar on speculation the economy remains too weak for the central bank to consider raising interest rates and stop asset purchases even as inflation accelerates. Sterling posted a weekly drop versus the euro as a report showed producer prices jumped last month more than economists predicted. Data next week may show unemployment increased, according to a Bloomberg survey. The Bank of England maintained its main interest rate at a record low of 0.5 percent yesterday and said it would put quantitative easing under review. Lloyds Banking Group Plc cut its forecasts for the pound today, citing the pace of the U.K. economic recovery. “There’s a strong belief that the focus of the Bank of England is on the real economy, not inflation,” said Ulrich Leuchtmann, head of currency research at Commerzbank AG in Frankfurt. “Normally, higher inflation means higher interest rates and that should be good for the currency. But that’s only true if a central bank reacts to higher inflation.” The pound declined 1 percent to $1.5915 as of 4:34 p.m. in London, leaving it 0.2 percent lower in the week. It lost 0.7 percent to 92.68 pence per euro, for a 1.4 percent drop since Oct. 2. It may trade at 94 pence per euro by the end of the year, Leuchtmann said. The median of 33 economists and strategists’ forecasts compiled by Bloomberg News is for the currency to end the year at 89 pence. Inflation Signs The price of goods at factory gates rose 0.5 percent from August, the Office for National Statistics said today in London. The median forecast of 15 economists surveyed by Bloomberg News was for a 0.1 percent increase. On the year, prices increased 0.4 percent after a decline the previous month. A report on Oct. 13 may still show the annual inflation rate slowed to 1.3 percent in September, from 1.6 percent a month earlier, according to a Bloomberg survey of 25 economists. The U.S. and euro-area have negative annual inflation rates. Separate data a day later will probably show the number of Britons claiming unemployment benefits climbed last month, according to a survey. The pound slumped 0.6 percent against the single European currency three days ago after a report showed manufacturing production unexpectedly declined in August to the lowest level in 17 years. U.K. government bonds fell today, with the yield on the two-year gilt rising 11 basis points to 0.80 percent. The 4.25 percent security due March 2011 dropped 0.19, or 1.9 pounds per 1,000-pound ($1,592) face amount, to 104.81. The 10-year gilt yield increased 10 basis points to 3.45 percent. ‘Quite Bearish’ Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. central bank will be prepared to raise interest rates when the outlook for the economy “has improved sufficiently.” U.K. 10-year gilts yielded 11 basis points more than same maturity Treasury notes today, down from 22 basis points a week ago. “We are quite bearish on sterling,” said Geoff Kendrick, a strategist at UBS AG in London. “In the next meeting, the Bank of England will do more quantitative easing. Ahead of that we get a lot of risk events that could point in that direction.” The Bank of England’s nine-member Monetary Policy Committee left its bond-purchase program unchanged at 175 billion pounds yesterday. “The Committee expects the announced program to take another month to complete,” it said in a statement accompanying the decision. “The scale of the program will be kept under review.” Interest-Rate Futures The yield on the short-sterling interest-rate futures contract expiring in March 2010 was at 0.88 percent today, from 1.02 percent a month ago, signaling investors are paring bets that policy makers will raise interest rates. The pound will trade at 92 pence per euro at year-end, Trevor Williams, chief economist at Lloyds in London, said in an interview today. Lloyds’s previous forecast was 86 pence. By the end of June, it will recover to 88 pence per euro, Williams said, compared with an earlier prediction of 84 pence. Sterling will be at $1.48 in the second quarter, less than the $1.51 Lloyds previously forecast.

Source