Pound Declines Against Dollar; BOE May Reduce Rates This Week

By Agnes Lovasz

Oct. 6 (Bloomberg) -- The pound fell against the dollar amid speculation the Bank of England will cut interest rates this week to bolster an economy that may be in a recession.

The British currency also rose to the highest level in seven months against the euro after BNP Paribas SA agreed to take control of Fortis in Belgium and Luxembourg for 14.5 billion euros ($19.7 billion) and the German government, banks and insurers agreed on a 50 billion-euro rescue for Hypo Real Estate Holding AG after an earlier bailout faltered.

The U.K. currency declined to $1.7587 by 6:48 a.m. in London, from $1.7714 at the end of last week, when it dropped 4 percent, the most since October 1992. The pound increased to 77.41 pence per euro, the strongest level since March 14, from 77.75 pence.

Congress passed a $700 billion financial-market rescue last week, designed to unlock credit markets. Still, the plan may do little to turn around job losses, spark manufacturing or boost consumer confidence, strategists and economists at Dresdner Kleinwort and JPMorgan Chase & Co. said.

Leaders of the European Union's four largest economies, including Prime Minister Gordon Brown, agreed in Paris two days ago to support their own nation's banks ``when faced with a crisis,'' while coordinating with their counterparts. Chancellor of the Exchequer Alistair Darling said yesterday that Britain is ``ready to do whatever it takes'' to help its banks.

Rate Decision

Bank of England policy makers will probably cut the benchmark interest rate by a quarter-percentage point to 4.75 percent when they meet on Oct.9, according to the median of 61 economists surveyed by Bloomberg. Reports last week showed manufacturing contracted, home values plunged and banks planned to scale back loans. The government seized mortgage lender Bradford & Bingley Plc as the credit crisis deepened.

U.K. industrial production probably fell 2 percent in August, the Office for National Statistics will say tomorrow, according to the median forecast of 27 economists surveyed by Bloomberg. Consumer confidence likely dropped in September after staying at a four-year low in August, a report from Nationwide Building Society may say in two days.

BNP Paribas will buy 75 percent of Fortis Bank Belgium, all of the Belgian insurance operations and 67 percent of Fortis's bank in Luxembourg, the Paris-based bank said in a statement today. Germany's financial industry agreed to double a credit line for Hypo Real Estate to 30 billion euros, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement.

U.K. government bonds rose last week as the spreading financial crisis drove investors to the safest assets. The yield on the 10-year gilt dropped 14 basis points in the five days to 4.41 percent. The yield on the two-year gilt slid 21 basis points to 4.02 percent. Bond yields move inversely to prices.

Britain entered a recession in July, according to the European Commission and the Confederation of British Industry, the country's biggest business lobby.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net