By Lukanyo Mnyanda and Andrew MacAskill
Aug. 19 (Bloomberg) -- The pound fell to near a two-year low against the dollar and slipped versus the euro after Bank of England policy maker Tim Besley said inflation will fall by the end of next year, adding to the case for interest-rate cuts.
The currency extended its longest sequence of declines against the dollar in more than 37 years, dropping for a 13th day. Increases in food and energy prices will slow, allowing inflation to ease toward the central bank's 2 percent ceiling by the end of 2009, Besley wrote in the Sun newspaper today. The Bank of England will release the minutes of its Aug. 7 policy meeting tomorrow.
``Once the Bank of England do signal that they are going to cut soon then I think the pound is going to come under extreme selling pressure,'' said Lee Hardman, a currency strategist in London for the Bank of Tokyo-Mitsubishi Ltd. ``The outlook for the pound continues to remain very dire.'' The currency may drop to $1.83 by the end of the year, he said.
The pound was at $1.8617 by 3:38 p.m. in London, from $1.8651 yesterday. It slipped to $1.8512 on Aug. 15, the lowest level since July 2006. The currency declined to 78.96 pence per euro, from 78.81.
The pound lost 3 percent against the dollar last week, its biggest five-day loss since the period through July 1, 2005, amid speculation falling house prices may exacerbate the economic slowdown. BOE Governor Mervyn King said Aug. 13 there is a ``chill in the economic air.'' The average asking price for a house fell 4.8 percent in August, Rightmove Plc, the nation's most-used property Web site, reported yesterday.
Gilts Gain
Government bonds rose, with the yield on the 10-year gilt falling 4 basis points to 4.56 percent. The 5 percent security due March 2018 rose 0.28, or 2.8 pounds per 1,000-pound ($1,862) face amount, to 103.40. The yield on the two-year gilt, which is more sensitive to the outlook for interest rates, fell 3 basis points to 4.52 percent. Bond yields move inversely to prices.
The notes, which have risen as investors have pared back expectations of higher interest rates, were also buoyed as stock markets fell around the world, boosting demand for the safest assets. The FTSE 100 Index dropped 2.1 percent.
The spread between U.K. government bonds and their German counterparts has narrowed as traders bet the end of a decade-long rally in the nation's property market will persuade policy makers to cut interest rates. The 10-year gilt yielded 43 basis points more than the German bund today, down from 69 basis points on Feb. 25, the widest this year.
Rate Futures
``All being well, inflation will fall again next year and will be much closer to the 2 percent target by the end of 2009,'' Besley wrote in the Sun. ``Don't expect food and energy prices to rise forever.''
Traders pared bets the central bank will raise the benchmark interest rate, with the implied yield on the March short-sterling futures contract dropping 6 basis points to 5.15 percent. It was at 5.44 percent at the end of July.
Inflation expectations, as measured by the difference between regular and index-linked bonds, have dropped from this year's peak reached in July. The so-called 10-year U.K. breakeven rate was 351 basis points today, from 416 basis points on July 7.
The pound has lost almost 12 percent since reaching a 26- year-high of $2.1161 on Nov. 9 as the Federal Reserve cut interest rates seven times to 2 percent from 5.25 percent since September. The BOE cut its main rate by 0.75 percentage point in the period.
The U.K. central bank kept its benchmark interest rate at 5 percent on Aug. 7 for a fourth month, as policy makers weighed the risk of accelerating inflation against the threat of a recession. Minutes of their meeting, showing how the panel voted, are due for release at 9:30 a.m. in London tomorrow.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net
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