The FINANCIAL — The pound declined for a second week against the dollar as minutes of the Bank of England's most recent meeting showed some policymakers said an increase in stimulus may be needed to support the economic recovery.
Sterling fell to a seven-week low versus the US currency as the minutes revealed the nine-member Monetary Policy Committee, led by Governor Mervyn King, voted unanimously to keep its key interest rate at a record low 0.5 per cent and hold its target for quantitative easing at £275 billion. The pound fell for a third week against the yen. Ten- and 30-year gilt yields dropped to record lows.
"More quantitative easing should weaken sterling, but other factors, such as general risk sentiment, can dominate," said John Hydeskov, chief analyst at Danske Bank in London. "It's natural for the BOE to apply more stimulus. We expect the Bank of England to increase its asset-purchase target by £50 billion in January 2012."
The pound dropped 2.1 per cent to $1.5475 on Friday, the biggest decline since the five days ended on September 23. The currency slid to $1.5423, the weakest since October 6. Sterling fell 1.1 per cent over the week to 120.21 yen, and was little changed at 85.65 pence per euro."The balance of risks to inflation" in the central bank's new forecasts "meant that a further expansion of the asset-purchase programme might well become warranted in due course", according to the minutes released on November 23 in London.
The Bank of England said the threat from the Eurozone debt crisis had increased.
Officials predicted inflation may slow below their 2 per cent target in two years, signalling they may need to increase the stimulus plan.German Chancellor Angela Merkel said on Thursday she remained opposed to joint euro bonds, damping optimism the policy would help resolve the region's sovereign-debt crisis.
"The foreign-exchange market is failing to produce many alternative safe-haven currencies" to the dollar, said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. "It's likely that sterling will outperform the euro near-term, even though cable is likely to see further downside pressure," she said, referring to the pound-dollar exchange rate.
The pound has declined 3.1 per cent in the past year, the third-worst performer after the Canadian and New Zealand dollars among 10 developed-market peers measured by Bloomberg Correlation-Weighted Indexes.
Britain is "well behind" where it needs to be on economic growth, Prime Minister David Cameron told the Confederation of British Industry annual conference on November 21. The government is working on a "massive" credit-easing plan, he said.
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