Pound Approaches 5-Year High as BOE Mortgage Limits Seen Lenient
The pound approached the highest in more than five years versus the dollar as analysts said the Bank of England’s new measures to cool the housing market wouldn’t derail the economy.
Sterling rose versus 13 of its 16 major peers before a report tomorrow that analysts said will show the British economy expanded 0.8 percent in the three months through March. The BOE’s Financial Policy Committee led by Governor Mark Carney introduced measures to limit riskier home loans and consumer debt. Carney said earlier this month that rising mortgage debt could threaten the recovery. U.K. government bonds were little changed.
“Sterling gained some support because the measures are in line with indications we got from Carney that the FPC’s approach would be slow and gradual,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “It’s not going to have an impact on monetary policy and rate-hike expectations are going to remain in place.”
The pound rose 0.2 percent to $1.7008 at 4:29 p.m. London time after climbing to $1.7063 on June 19, the highest level since October 2008. Sterling appreciated 0.4 percent to 79.93 pence per euro.
The FPC said lenders must limit the proportion of mortgages at 4.5 times income to no more than 15 percent of their new home loans. It also said banks must decline to lend to prospective buyers who fail a new repayment test.
Policy Package
“Without policy action, the risk of excessive household indebtedness is material,” the BOE said in its semi-annual Financial Stability Report. “The policy package is targeted to mitigate this risk in a prudent and proportionate fashion.”
Carney said on June 12 the central bank may raise interest rates from a record low earlier than investors expect as he expressed concern that mounting debt related to the housing market could undermine stability. The BOE’s Monetary Policy Committee held its key rate at 0.5 percent on June 5, where it’s been since March 2009.
“The pound is higher on the assumption these measures are fairly benign for the economy,” saidGavin Friend, a currency strategist at National Australia Bank Ltd. in London. “In any case, it’s the growth profile that is driving the U.K. rate debate.”
The pound strengthened 2.3 percent this year, according to Bloomberg Correlation-Weighted Indexes. The euro fell 1.9 percent and the dollar weakened 0.7 percent.
Sterling Futures
Implied yields on short-sterling futures contracts expiring in December 2014 rose one basis point, or 0.01 percentage point, to 0.86 percent.
Investors are betting the Bank of England will raise its benchmark rate by February, Sonia contracts show. That compares with May before Carney’s speech on June 12.
Benchmark 10-year gilts yielded 2.64 percent after dropping nine basis points yesterday, the biggest one-day decline since May 28. The price of the 2.25 percent bond due in September 2023 was 96.87.
Two-year gilt yields, seen as most sensitive to interest-rate expectations, increased less than one basis point to 0.83 percent.
Gilts returned 3.7 percent this year though yesterday, Bloomberg World Bond Indexes show. German securities earned 4.7 percent and Treasuries gained 3.1 percent.
