Brits face forward guidance quandary with positive jobs report

Pound rises near 4-year high

The pound approached a four-year high against the dollar after the U.K. unemployment rate fell more in the three months through February than analysts forecast, adding to signs the economy is gaining traction.

Sterling appreciated to a six-week high versus the euro as the jobless rate dropped below the 7 percent threshold that Bank of England Governor Mark Carney has set as an initial guide for considering increasing interest rates. The report also showed wage growth accelerated to 1.7 percent, matching the inflation rate in February. U.K. government bonds declined, with 10-year yields rising the most in two weeks.

“The unemployment data is pretty encouraging and we like sterling from here,” said Josh O’Byrne, a foreign-exchange strategist at Citigroup Inc. in London. “This opens up the possibility that the Bank of England may need to raise interest rates sooner than the market is expecting, which could spur on the sterling rally.”

The pound gained 0.4 percent to $1.6796 at 4:33 p.m. London time after climbing to $1.6823 on Feb. 17, the highest since November 2009. Sterling rose 0.4 percent to 82.21 pence per euro after appreciating to 82.20 pence, the strongest since March 6.

The jobless rate, as measured by International Labour Organization methods, dropped to 6.9 percent in the three months through February from 7.2 percent in the quarter through January, the Office for National Statistics said. The median forecast in a Bloomberg News survey of economists was for a decline to 7.1 percent.

Forward Guidance

Carney introduced a policy of interest-rate guidance in August to suppress expectations the Monetary Policy Committee would rush to increase its official bank rate from a record-low 0.5 percent as the economy recovered. He revised the plan in February, saying officials would wait even after 7 percent was reached to allow some of the spare capacity in the economy to be used up.

Market pricing shows the Bank of England will raise borrowing costs in May next year, according to ICAP Plc analysis based on Sterling Overnight Index Average rates.

The annual inflation rate slowed to 1.6 percent in March, the lowest in 4 1/2 years, a report showed yesterday.

“With inflation so low and pay growth weak, there is little to move the MPC away from its implicit view - suggested by MPC members tending to confirm market pricing at the time of the February Report - that the first rate hike will come early next year,” David Tinsley, U.K. economist at BNP Paribas SA in London, wrote in a research note. “Our central case remains that the MPC will make the first hike in February next year, riding the wave of low inflation and sluggish earnings growth.”

Best Performer

The pound advanced 5.7 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2.1 percent, while the dollar weakened 0.2 percent.

The benchmark 10-year gilt yield climbed four basis points, or 0.04 percentage point, to 2.64 percent, the biggest increase since April 2. The 2.25 percent bond due in September 2023 fell 0.285, or 2.85 pounds per 1,000-pound face amount, to 96.805.

Gilts returned 3.6 percent this year though yesterday, according to Bloomberg World Bond Indexes. German securities earned 3.1 percent and U.S. Treasuries rose 2.4 percent.

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