The pound fell the most against the dollar in almost a week and gilts rose as escalating political instability in the Middle East and North Africa curbed investor demand for all but the safest assets. Sterling also weakened against the Swiss franc and the Japanese yen as oil prices surged to the highest in more than two years amid concern that production in the holder of Africa’s biggest crude reserves will be disrupted. The pound was little changed against the euro after European Central Bank council member Yves Mersch said policy makers may toughen their stance on inflation next week, boosting the likelihood of an interest- rate increase. “The currency market is adjusting to the highly worrying developments in the Middle East,” said Audrey Childe-Freeman, head of European currency strategy at JPMorgan Chase & Co.’s private bank. “The safe haven assets are doing well and that leaves sterling in a vulnerable position.” The pound fell 0.4 percent to $1.6169 as of 11:44 a.m. in London, after dropping as much as 0.6 percent to $1.6132, the steepest intraday slide since Feb. 16. Sterling traded at 84.32 pence per euro from 84.31 pence. Government bonds rallied across the world while stocks and U.S. equity futures declined as the Libyan unrest hurt investor demand for assets perceived as being more risky. Al-Jazeera reported that at least 250 people have died in the Libyan capital of Tripoli alone during anti-government protests, which follow the toppling of regimes in Tunisia and Egypt. Gilts Rise Ten-year gilts climbed for a second day, reducing yields by five basis points to 3.68 percent. The U.K.’s 4.75 percent bond due March 2020 rose 0.385, or 3.85 pounds per 1,000-pound ($1,615) face amount, to 108.125. Britain’s currency was still little changed against a basket of nine developed-nation peers, based on Bloomberg Correlation-Weighted Currency Indexes. The pound has gained 3.6 percent against the dollar and 1.7 percent versus the euro this year amid speculation the Bank of England will be forced to raise its main interest rate to curb above-target inflation. Minutes from the central bank’s Feb. 10 meeting, when it kept its benchmark rate unchanged at a record low 0.5 percent, will be released tomorrow. A small increase in the rate may prevent a more rapid tightening later, policy maker Martin Weale said in a BBC Radio 4 interview broadcast yesterday. “The BOE minutes will be a market mover,” said Childe- Freeman in London. “The Monetary Policy Committee is more split than usual so you could see another MPC member going to the hawkish camp.” BOE Split Policy makers have been split three ways since October, with Adam Posen calling for an expansion of the bank’s bond- purchase plan and Andrew Sentance voting to raise the key rate by 25 basis points to 0.75 percent. Sentance was joined by Weale at the central bank’s Jan. 13 rate decision. Money markets signal the Monetary Policy Committee may boost the key rate by about 75 basis points by year-end, according to the Sterling overnight interbank average, Tullett Prebon Plc data show. The so-called Sonia rate also indicates an increase of about 25 basis points as soon as May. Calls for higher interest rates in the U.K. come at the same time that Britain attempts to implement the deepest budget cuts since World War II. Prime Minister David Cameron’s coalition government is trying to reduce the fiscal deficit from an estimated 10 percent of gross domestic product in the year through March to 1.9 percent by 2015. Britain posted its largest budget surplus last month since July 2008 as government revenue surged in the biggest tax- collection month of the year. Revenue exceeded spending by 3.74 billion pounds in January, compared with a deficit of 1.27 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 13 forecasts in a Bloomberg survey was for a surplus of 100 million pounds. The surplus including government support for banks was 5.25 billion pounds. 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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