Pound Falls Against Dollar; House Prices Drop Most Since 1991

By Agnes Lovasz

Oct. 2 (Bloomberg) -- The pound fell against the dollar after an industry report showed house prices dropped in September by the most since at least 1991, heightening speculation Britain is tipping into a recession.

The U.K. currency traded near the lowest level in three weeks as Nationwide Building Society said property values slid 12.4 percent from a year ago, matching the estimate in a Bloomberg survey of economists. The Bank of England releases its quarterly survey on credit conditions today. The reports may add to speculation policy makers will cut the key interest rate from 5 percent next month.

``The U.K. economy is on the brink of a recession,'' Ben Eldred and Katherine Dann, economists in London at Daiwa Securities SMBC Co., wrote in a research report. ``A move next month does look to be on the cards now, and this will herald an aggressive easing of policy through 2009.''

The U.K. currency fell to $1.7615, near the weakest since Sept. 12, before trading at $1.7633 as of 8:29 a.m. in London, from $1.7697 yesterday. It rose to 78.70 pence per euro, from 79.16 pence.

The European Central Bank decides on interest rates at 1:45 p.m. in Frankfurt. All 58 economists surveyed by Bloomberg expect policy makers to keep the benchmark rate at 4.25 percent.

U.K. house prices also fell 1.7 percent from August, more than predicted by economists, according to Nationwide, the U.K.'s fourth-biggest mortgage lender.

The Bank of England releases its third-quarter survey at 9:30 a.m. in London.

Manufacturing Contracts

The pound fell versus the dollar yesterday after an industry report showed manufacturing contracted last month at the fastest pace in 16 years amid a credit squeeze that has crippled bank lending. The government also said services- industry growth stalled in the three months through July for the first time in six years.

The worst banking crisis since the Great Depression has forced the sale of HBOS Plc, the U.K.'s biggest mortgage lender, prompted the government to seize Bradford & Bingley Plc and led the Bank of England to offer emergency funds to money markets. Banks granted the fewest home loans since at least 1999 in August.

The implied yield on the March short-sterling futures contract fell 4 basis points today to 4.79 percent as traders added to bets policy makers will lower borrowing costs in an effort to revive economic expansion.

Slowing growth will spur the central bank to lower its key rate in the fourth quarter to 4.75 percent from 5 percent now, according to the median forecast of economists in a Bloomberg survey. The next decision is scheduled for Oct. 9, when policy makers will probably keep the rate on hold then, according to a separate survey of economists.

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

U.K. government bonds were little changed, with the yield on the 10-year gilt rising 1 basis point to 4.44 percent. The 5 percent security due June 2010 fell 0.05, or 50 pence per 1,000- pound ($1,766) face amount, to 104.32. The yield on the two-year note was at 3.97 percent. Bond yields move inversely to prices.

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