BOE Interests Rate Statement

U.K. Pound Falls Versus Euro as BOE Holds Key Rate at 5 Percent

June 5 (Bloomberg) -- The pound fell against the euro after accelerating inflation prevented the Bank of England from cutting interest rates to support the economy.

The Monetary Policy Committee, led by Governor Mervyn King, held its main rate at 5 percent today as forecast in a Bloomberg News survey, even after the country's biggest mortgage lender said house prices dropped the most in 15 years in May. It extended losses versus the euro as European Central Bank President Jean-Claude Trichet suggested borrowing costs may be lifted next month to quell price growth.

``Sterling has gone to hell in a handbag,'' David Bloom, London-based global head of currency strategy at HSBC Plc, Europe's biggest bank by market value, said in a Bloomberg Television interview. ``Sell it against anything that you have. Sell it across the board. Sterling is going down.''

The pound dropped to 79.54 pence per euro, the lowest level since May 28, and was at 79.47 pence by 3:25 p.m. in London, from 78.94 yesterday. It was also at $1.9552, from $1.9556 yesterday, after slipping to as low as $1.9462.

The U.K. central bank's rate-setting committee didn't publish a statement after today's decision, which was predicted by all 60 economists surveyed by Bloomberg. Policy makers voted 8 to 1 to keep rates on hold at last month's meeting as record-high oil prices and spiraling food costs stoked inflation. Consumer- price growth held above the bank's 2 percent target for the seven months through April, government data show.

Trichet on Rates

The ECB also kept its refinancing rate at 4 percent today, as predicted in a separate Bloomberg survey.

Still, Trichet said in Frankfurt today the region's main rate may be increased next month as risks to price stability in the region ``have increased further.''

U.K. policy makers last cut borrowing costs in April to try and prevent a slowdown in the real-estate market and a credit squeeze from harming the wider economy.

Gilts followed German bunds lower after Trichet's remarks. The yield on the U.K.'s two-year note, most sensitive to the interest-rate outlook, rose 13 basis points to 5.03 percent. The price of the 4.75 percent security due June 2010 fell 0.24, or 2.4 pounds per 1,000-pound ($1,949) face amount, to 99.47. The 10-year gilt yield climbed 8 basis points to 5.04 percent. Yields move inversely to bond prices.

``Gilts are following U.S. Treasuries and German bunds lower,'' said Peter Schaffrik, a fixed-income strategist at Dresdner Kleinwort in London. ``We believe the U.K. economy will slow down enough to bring down price pressures and interest rates. But at the moment inflation remains a key issue.''

`Forced to Cut'

U.K. government debt may reverse its declines on speculation a waning economy will force the central bank to lower borrowing costs later in the year. Economists in a Bloomberg survey predict the central bank will cut its benchmark rate to 4.50 percent by the end of this year.

``We still have a preference for shorter-dated gilts,'' said David Scammell, a money manager in London at Schroders Investment Management Ltd. which has about $19.5 billion in assets. ``We think the Bank of England will be forced to cut rates'' in 2008, he said.

HBOS Plc said today the cost of an average home slipped 3.8 percent from a year earlier, the most since April 1993. Shares in Bradford & Bingley Plc, the U.K.'s biggest home-loan provider to landlords, fell the most since the bank went public in 2000 on June 2 after it reported rising loan arrears.

Inflation `Worries'

``Everything is coming together at the wrong time for the pound,'' said Geoffrey Yu, a Zurich-based currency strategist at UBS AG, Switzerland's largest lender, who forecasts the currency will drop to $1.88 and 80 pence per euro by the end of June. ``The mortgage market is highly exposed and there are worries about inflation. The U.K. bank may have to stay on hold until the end of the year.''

The pound has fallen against 14 of the 16 most-traded currencies since Dec. 6, when the Bank of England started lowering its main rate, from a 6 1/2-year high of 5.75 percent. It has dropped 10 percent versus the euro and 4 percent against the dollar in that time.

The ECB has held its main rate at a more than six-year high of 4 percent since June, while the Federal Reserve has lowered its target rate for overnight loans between banks seven times since September, to 2 percent.

``Inflation rates have risen significantly since the autumn of last year owing mainly to strong increases in energy and food prices,'' said Trichet at a press conference to explain today's decision.

Expectations for inflation in Europe's second-biggest economy today rose to the highest in 8 1/2 years, according to the spread between the 10-year gilt and its index-linked counterpart. The so-called breakeven rate, a gauge of bond traders' views on whether price-growth will quicken or slow, climbed to 3.75 percent, from 3.48 percent before the Bank of England's last interest-rate announcement on May 8.