Pound Falls Against Euro as Bank of England Keeps Rate on Hold

By Kim-Mai Cutler and Andrew MacAskill

Aug. 7 (Bloomberg) -- The pound stayed near a seven-week low against the euro after the Bank of England left its benchmark interest rate unchanged.

The nine-member Monetary Policy Committee, facing the threat of a recession and the fastest inflation in more than a decade, kept U.K. borrowing costs at 5 percent for a fourth month today, matching the forecasts of all 60 economists in a Bloomberg News survey. The bank, led by Governor Mervyn King, will publish new quarterly inflation forecasts on Aug. 13.

``It's highly unlikely we'll hear from the Bank of England today,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp., before the decision was announced. ``The pound is going to continue to be under some fairly consistent pressure.''

Against the euro, the pound weakened to 79.28 pence per euro by 12:02 p.m. in London, from 79.11 pence yesterday. It was also at $1.9508, from $1.9477 yesterday, when it slipped to $1.9467, the lowest level since June 16.

The U.K. currency may fall to $1.90 and to 80 pence per euro within the next month, Derrick predicted.

The pound slipped earlier after an industry survey showed house prices in the U.K. dropped the most in at least a quarter of a century in July as banks starved the property market of credit, and pessimism about the economy grew.

The average cost of a home in the U.K. fell 8.8 percent in the year to 177,351 pounds ($345,825), HBOS Plc, the country's biggest mortgage lender said today. Prices slipped 1.7 percent from June.

Housing Slump

The worst housing-market slump in more than two decades deepened after mortgage approvals fell to the lowest since at least 1999 and consumer sentiment dropped the most since 2004.

Barclays Plc, the U.K.'s third-biggest bank, said first-half profit fell 34 percent as securities trading declined and credit writedowns increased.

Britain's faltering economy will weaken the currency to $1.90 and to 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The yield on the 10-year note will end the year at 4.87 percent, according to a separate survey.

Government bonds gained, pushing two-year yields down to the lowest level in almost three months. The yield on the two-year gilt fell 3 basis points to 4.66 percent. The price of the 4.75 percent security due June 2010 climbed 0.06, or 60 pence per 1,000-pound ($1,948) face amount, to 100.15. The 10-year gilt yield slipped 5 basis points to 4.71 percent. Yields move inversely to bond prices.

The European Central Bank also meets on interest rates today. Policy makers are expected to keep the main refinancing rate at 4.25 percent, according to all 60 economists in a Bloomberg survey.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net