Pound Falls Against Euro on Growing Case for Interest-Rate Cut

By Andrew MacAskill and Agnes Lovasz

July 22 (Bloomberg) -- The pound declined for a third day against the euro on concern the fallout from the global credit crunch will hurt the U.K. economy more than anticipated.

The effects of the squeeze on bank lending are worse than previously expected, Chancellor of the Exchequer Alistair Darling said in an interview with Bloomberg Television, which will air excerpts today. The pound fell yesterday as evidence of further declines in house prices added to the case for lower interest rates. Traders added to bets the Bank of England will cut borrowing costs, interest-rate futures showed today.

``The drivers are mainly the anxiety state of the market relative to the banking sector and the steady deterioration of the economic outlook,'' said Matteo Regesta, an interest-rate strategist in London at BNP Paribas SA, France's biggest bank. ``The market is now in the process of re-pricing rate cuts.''

The British currency weakened to 79.48 pence per euro as of 8:39 a.m. in London, from 79.46 pence yesterday. It was little changed at $2.004, from $2.003.

U.K. government bonds rose, with the yield on the 10-year gilt falling 3 basis points to 5.02 percent. The price of the 5 percent security due March 2018 climbed 0.23, or 2.30 pounds per 1,000-pound ($2,002) face amount, to 99.86. The two-year note yield was at 5.07 percent. Bond yields move inversely to prices.

The central bank has lowered the key interest rate three times since November, to 5 percent, to buoy the economy, Europe's second-largest. Bank of England policy maker David Blanchflower told the Guardian newspaper yesterday further cuts are needed.

Rate Futures

The prospect of lower interest rates increased today, with the implied yield on the December short-sterling futures contract falling 3 basis points to 5.87 percent.

The faltering economy will weaken the pound to $1.90 and to 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. Gains in gilts will lower the yield on the 10-year note to 4.84 percent, according to a separate Bloomberg survey.

The pound has risen 0.8 percent against the dollar this year and dropped 7.6 percent versus the euro.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net