EU focus: U.K. Pound depreciates on rates

The pound fell against the euro after the Confederation of British Industry lowered its economic growth estimates for the U.K. and a report showed house prices unexpectedly fell the most in seven months in April.
Gross domestic product will rise by 1.7% in 2011 compared with a February estimate of 1.8%, while expansion next year will be 2.2% instead of 2.3%, Britain’s biggest employers’ group said in quarterly forecasts released today.
U.K. house prices fell the most in seven months in April, a separate report from Halifax showed today.
U.K. house prices contracted 1.4% in April from the previous month, compared with 0.1% growth estimated by analysts.
“The data has been weak and the problem is that we haven’t yet seen the full impact of the fiscal cuts on the economy,” said Sarah Hewin, a senior economist at Standard Chartered Bank. “That means the data is likely to get worse, which will allow the Bank of England to keep rates steady for longer. That will certainly keep the pound under pressure.”


The Bank of England kept its benchmark interest rate unchanged at a record low 0.5% on May 5 to boost the economy, which grew 0.5% in the first quarter. Slowing economic growth comes as Britain implements the deepest government spending cuts since World War II, threatening to drag output lower.
The central bank’s monetary policy stance is also being complicated by inflation, which is accelerating at twice its 2% target. Inflation still unexpectedly eased to 4% in March, following five months of acceleration to a more than two-year high of 4.4% in February.
“Growth will remain weak and we see no rate hike in 2011,” said Hewin. “Rate hikes have been pushed back. We see the first rate hike in the first quarter of 2012.”
Money markets are factoring in a 25 basis-point increase in the central bank’s main rate by year-end.