The pound weakened against the euro for the first day in five after U.K. Chancellor of the Exchequer George Osborne increased a tax on banks, constraining an industry that accounts for about 8 percent of the economy. Sterling slid against 14 of its 16 most-actively traded peers. The extra levy will raise 800 million pounds ($1.3 billion) as Britain’s government tries to plug a record budget deficit. Osborne, who is negotiating lending and pay targets with British banks and aiming to stem the U.K. budget deficit, said on BBC Radio 4 that he’s raising the tax earlier than anticipated because lenders’ stability has improved. “Sterling has been sold across the board after Mr. Osborne’s comments,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank in London. “It’s a knee- jerk reaction to the higher bank levy. The U.K. economy, whether you like it or not, is still heavily reliant on the financial sector, so anything that adversely affects it will be reflected in the currency.” The pound depreciated 0.6 percent to 84.82 pence per euro at 1:13 p.m. in London. Britain’s currency lost 0.2 percent to $1.6073, for a fourth straight day of losses. The U.K. will temporarily charge banks 0.1 percent on short-term liabilities and 0.05 percent for long-term liabilities in March and April, according to a statement from the Treasury today. The levy will enable the government to raise 2.5 billion pounds in the current financial year ending in April, rather than in future years as was originally intended. Financial Levy Britain’s government aims to raise 10 billion pounds by 2015 by taxing bank balance sheets as it tries to reduce its fiscal deficit from an estimated 10 percent of gross domestic product in the year through March to 1.9 percent by 2015. The financial-services industry generates about 12 percent of U.K. tax revenue, according to estimates by PricewaterhouseCoopers LLP and the government of the City of London, the financial district’s municipal government. “The market’s focus on the bank levy is purely because of the lack of any other data,” said Elizabeth Gregory, a Geneva- based market strategist at ACM Advanced Currency Markets, which handles about $150 billion of foreign-exchange trades a month. “Over the longer term, the effect of the levy on the pound will pale into insignificance compared to the future trajectory of interest rates.” The Bank of England’s Monetary Policy Committee, led by Governor Mervyn King, will leave its 0.5 percent key interest rate unchanged when it meets on Feb. 10 even as inflation exceeds the central bank’s 2 percent limit, according to a Bloomberg survey of 62 economists. Inflation quickened to 3.7 percent in December, matching an April reading that was the highest since November 2008. Monetary policy makers are expected to increase the rate by 25 basis points, or 0.25 percentage point, to 0.75 percent in the fourth quarter, according to a Bloomberg survey of 40 economists. Gilt ‘Comeback’ U.K. two-year notes rose for the first day in three, with the 4.5 percent security due March 2013 adding 0.05, or 50 pence per 1,000-pound ($1,612) face amount, to 106.04. The yield on the ten-year U.K. gilt was little changed at 3.83 percent. Ten-year gilts suffered their biggest five-day drop since November last week as improving economic data from the U.K. boosted speculation the Bank of England will be forced to raise borrowing costs to curb inflation. “The market has potentially gotten ahead of itself in pricing in rate hikes,” said Jones. “At these levels they still offer longer-term value,” he said of gilts. Short-sterling futures rose for the first day in three, reducing the implied yield on the contract expiring in December by three basis points to 1.69 percent. A decline in the yield, which is used to gauge central bank rate expectations, indicates investors reduced bets that policy makers will increase borrowing costs. The U.K. 10-year breakeven rate, an indication of investors’ inflation expectations derived from the yield gap between conventional and index-linked bonds, was little changed at 3.23 percent. The rate climbed as high 3.33 percent earlier today, the highest level since September 2008. The U.K. sold 1 billion pounds of inflation-linked bonds maturing Nov. 22, 2022, according to a statement from the Debt Management Office today. To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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