U.K. Pound Headed for Weekly Decline as BOE Keeps Rate on Hold

By Lukanyo Mnyanda and Andrew MacAskill

Sept. 5 (Bloomberg) -- The U.K. pound fell against the euro, headed for a fourth weekly loss, after the Bank of England kept interest rates on hold yesterday, likely delaying a recovery in Europe's second-biggest economy.

The pound was also poised for a seventh weekly decline versus the dollar. The nine-member Monetary Policy Committee, which is trying to balance the risk of a recession with the fastest inflation in more than a decade, kept the benchmark rate at 5 percent, matching the forecast of all 61 economists surveyed by Bloomberg News.

``Sterling is really seen as the currency-market dog, if you like, in being seen to be sold for any reason you can possibly think of,'' said Jeremy Stretch, senior strategist in London at Rabobank International. ``It is difficult to find too many ways to be positive about sterling.''

The pound was at 81.22 pence per euro by 8:16 a.m. in London, from 80.58 pence a week ago. It fell to 81.88 pence yesterday, the weakest since the single European currency debuted in 1999. The pound was at $1.7609, from $1.8211 on Aug. 29, after earlier slipping to $1.7538, the lowest level since April 2006. It has dropped 3.4 percent in the past week.

The U.K. currency's trade-weighted index, a gauge of the currency's performance against Britain's major trade partners, has slumped 10 percent this year and was at 84.92 today, according to Deutsche Bank AG. The measure is at the lowest level since at least 2000.

The pound has declined as reports showed the economic slowdown is deepening. House prices declined for a fifth month, HBOS Plc said yesterday. It is almost 10 percent lower against the dollar in the past month, the second-worst performance of the 16 most actively-traded currencies. It has fallen 2.8 percent versus the euro in the period.

Gilts Advance

The currency's slide accelerated after Chancellor of the Exchequer Alistair Darling told the Guardian newspaper on Aug. 30 the U.K. faces its biggest economic slowdown in 60 years. He later said he was referring to the world economy.

U.K. government bonds headed for a second week of gains. The yield on the 10-year gilt fell 3 basis points to 4.42 percent, leaving it 6 basis points lower in the week. The price of the 5 percent security due March 2018 rose 0.22, or 2.2 pounds per 1,000-pound face amount, to 104.43.

The two-year gilt yield, which is more sensitive to the interest-rate outlook, dropped 2 basis points to 4.36 percent, a decline of 13 basis points in the past five days. Bond yields move inversely to prices.

Britain's central bank is seeking to bring inflation, which accelerated to 4.4 percent in July, below its 2 percent target. It has cut the benchmark rate three times since the end of November.

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