U.K. Pound Declines Against Dollar and Euro Before BOE Minutes

By Lukanyo Mnyanda and Andrew MacAskill

Aug. 20 (Bloomberg) -- The U.K. pound declined against the dollar and euro on speculation the minutes of the Bank of England's last policy meeting will show more policy makers favor cutting interest rates to revive the economy.

The currency traded near the lowest level in two years versus its U.S. counterpart and fell for a third day against the euro. Governor Mervyn King, who with six other members of the Monetary Policy Committee voted to keep interest rates on hold in July, said Aug. 13 there is a ``chill in the economic air.'' One member voted for an increase and another for a reduction last month.

``We have come to the view there could be one or two votes for a cut,'' said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. ``This could be a new catalyst triggering a new phase of sterling weakness.''


The pound was at $1.8598 by 9:14 a.m. in London, from $1.8670 yesterday. It slipped to $1.8512 on Aug. 15, the lowest level since July 2006. It was also at 79.31 pence per euro, from 79.14. It may drop to $1.80 by the end of the year, Mellor said.

The U.K. currency dropped yesterday after policy maker Tim Besley, who voted for higher rates at the July 10 meeting, wrote in the Sun newspaper that 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. The minutes, showing how the panel voted Aug. 7, are due for release at 9:30 a.m. in London.

Britain's currency lost 3 percent against the dollar last week, its biggest five-day decline since the period through July 1, 2005, as traders bet falling house prices will exacerbate the economic slowdown as the threat of a recession looms. The central bank kept its benchmark rate at 5 percent on Aug. 7, as policy makers weighed the risk of accelerating inflation against the threat of a recession.

Gilts Slip

Gilts fell, with the yield on the 10-year bond rising 1 basis point to 4.59 percent. The 5 percent security due March 2018 slipped 0.07, or 70 pence per 1,000-pound ($1,862) face amount, to 103.10. The yield on the two-year gilt, which is more sensitive to the outlook for interest rates, climbed 2 basis points to 4.56 percent. Bond yields move inversely to prices.

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 housing market will persuade policy makers to cut interest rates. The 10-year gilt yielded 43 basis points more than the German bund, down from 69 basis points on Feb. 25, the widest this year.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net