Pound jumps as U.K. policy makers end push for more bond buying

The pound (FOREX:GBPUSD) rallied against the dollar and the euro after minutes of the Bank of England’s latest meeting showed policy makers voted unanimously against expanding their stimulus program that tends to debase the currency.

Sterling strengthened versus most of its 16 major peers. In Governor Mark Carney’s first policy meeting, Paul Fisher and David Miles dropped their call for an expansion of the asset- purchase program in favor of a strategy involving guidance on future interest rates, today’s minutes showed. Gilts dropped as data revealed U.K. unemployment claims fell at their fastest pace in three years. Federal Reserve Chairman Ben S. Bernanke said asset purchases “are by no means on a preset course.”

“It does seem certain that Carney is viewing forward guidance as a favored policy tool over quantitative easing, at least for the present time,” said Jane Foley, senior currency strategist at Rabobank International in London. “In the medium term, it’s still going to be difficult for sterling to pick up the pace.”

The pound rose 0.2% to $1.5185 at 3:40 p.m. London time after falling to as low as $1.5079. It appreciated 0.6% to 86.31 pence per euro after touching 87.11 pence, the weakest level since March 13.

Sterling extended its gains versus the dollar after Bernanke said the U.S. central bank’s bond purchases could be reduced more quickly or expanded as economic conditions warrant.

Yield Difference

The benchmark 10-year gilt yield rose three basis points, or 0.03 percentage point, to 2.29%, after falling to 2.26% yesterday, the lowest since June 20. The 1.75% security maturing in September 2022 dropped 0.24, or 2.40 pounds per 1,000-pound face amount, to 95.56. Two-year yields were little changed at 0.31%.

“Given the already large size of the asset-purchase program, there was merit in pursuing a mixed strategy with regards to the different policy instruments,” the minutes said. “The committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate thresholds would shed light on both the quantum of additional stimulus required and the form it should take.”

Carney joined the Bank of England on July 1 with a reputation for policy innovation earned in his previous role as Bank of Canada governor. The unprecedented measure of providing an indication on the interest-rate outlook followed a signal from Bernanke that the U.S. central bank may start slowing its bond-buying program later this year. The Bank of England is due to announce next month how officials will use forward guidance when setting policy.

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