Pound Weakens on Speculation Bank of England to Lower Forecasts

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May 10 (Bloomberg) -- The pound weakened versus the dollar and the euro on speculation the Bank of England will lower its economic growth forecasts when it releases its inflation report tomorrow, making higher interest rates less likely.

Sterling declined against most of its major peers, falling from the highest in more than a month versus the euro. The currency depreciated even as data today showed U.K. retail sales and a house-price gauge rose last month.

“The economic picture in the U.K. is still mixed and today’s data isn’t going to change the Bank of England’s stance on rates,” said Derek Halpenny, European head of currency research at Bank of Tokyo in London. “We’re still looking at sterling trending weaker.”

The pound fell 0.4 percent to $1.6340 as of 4:52 p.m. in London, approaching yesterday’s three-week low. Britain’s currency also depreciated 0.4 percent against the euro to trade at 87.91 pence after reaching 87.21 pence, the strongest level since April 6, and was little changed at 131.91 yen.

The Bank of England left its key rate at a record low 0.5 percent on May 5. Governor Mervyn King has indicated he favors keeping borrowing costs on hold even as inflation accelerates at twice the bank’s 2 percent limit.

“The pound continues to look vulnerable against most currencies,” Adrian Schmidt, a currency strategist at Lloyds Bank Corporate Markets in London, wrote in a report today. The BOE’s inflation report “is likely to include major downgrades in growth expectations.”

Debt ‘Consequences’

Money markets are factoring in a 25 basis-point increase in the central bank’s main rate by year-end, according to sterling overnight index average forwards, Tullett Prebon Plc data show.

“The economic consequences of high-level indebtedness now would become more severe if rates were to rise,” King told a committee of the European Parliament in Brussels on May 2.

U.K. retail sales at outlets open at least a year jumped 5.2 percent in April from a year earlier, the most in five years, as public holidays and the warmest April on record spurred spending, the British Retail Consortium said today.

A house-price gauge climbed to the highest level in nine months in April as demand for homes stabilized, a separate report from the Royal Institution of Chartered Surveyors showed.

The Confederation of British Industry yesterday lowered its economic growth estimates for the U.K., saying gross domestic product would rise 1.7 percent in 2011 compared with a February estimate of 1.8 percent.

U.K. 10-year gilt yields rose one basis point to 3.38 percent. The yield on the two-year note climbed two basis points to 1.02 percent.

The Debt Management Office sold 1.2 billion pounds of 1.875 percent bonds due Nov. 22, 2022, at an auction today. Investors bid for more than twice the amount on offer.