LONDON, Dec 10 ― The pound strengthened for the first time in three days versus the euro before the Bank of England’s last policy decision of the year, with economists unanimously predicting officials will keep interest rates at a record-low level.

Sterling gained the most in a week against the dollar yesterday. Recent data provided a mixed outlook for the UK economy, with services output increasing last month, while a measure of house prices fell and manufacturing production declined more than analysts forecast in October. BOE policy makers have been weighing the strength of Britain’s economy against global-growth concerns, including a slowdown in emerging markets and tumbling commodity prices.

After the BOE’s previous policy meeting on November 5, the pound fell more than 1 per cent against both the dollar and euro as the central bank cut its forecasts for growth and inflation in its quarterly Inflation Report. This solidified expectations that interest rate increases will remain in the distant future. Renewed declines in oil, which has pushed Brent crude below US$40 (RM170) a barrel this week, have also diminished the outlook for inflation and in turn supported government bonds.

“We are not expecting anything which significantly shifts policy expectations for low rates until later next year,” said Lee Hardman, a London-based currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “The outlook is still similar to the quarterly Inflation Report from November so far.”

The pound gained 0.3 per cent to 72.41 pence per euro as of 7.43am London time, after touching 72.80 pence on December, 8, the weakest level since October 22. Sterling was little changed at US$1.5179 after climbing 1.2 per cent yesterday.

A “similar dovish tone to last month could weigh modestly on the pound. The drop in oil, if sustained this week, is adding to the likelihood the BOE will wait a little longer before raising rates,” Hardman said.

Rate outlook

Traders are betting officials will keep the official bank rate at 0.5 per cent through 2016, according to forward contracts based on the sterling overnight index average, or Sonia. As expectations have been pushed back for when the first increase in rates will come, the implied yield on the short-sterling futures contract expiring in December 2015 has dropped to 0.58 per cent from 0.92 per cent a year ago, when at least one increase of 25 basis points was priced in.

Officials will vote 8-1 to keep the benchmark rate at 0.5 per cent, where it’s been since March 2009, according to a Bloomberg survey of economists, with Ian McCafferty seen maintaining his push for an increase. ― Bloomberg