British Pound Declines as Economy Slumps, Home Sales Tumble

By Matthew Brown

Jan. 13 (Bloomberg) -- The pound fell against the dollar and the euro as reports showed the U.K. economy slumped the most in two decades and home sales dropped to the lowest level since at least 1978.

The U.K. currency also declined versus the Japanese yen and the Swiss franc as stock markets around the world slid amid growing concern about global growth. A British Chambers of Commerce survey of almost 6,000 companies showed the economy is at its most fragile since it began issuing the report in 1989.

“Sterling is back under pressure following the continued deterioration in U.K. data,” currency strategists from BNP Paribas SA including Hans-Guenter Redeker said in a research note today. “We would anticipate euro-sterling rebounding in the coming days, retracing some of the sharp losses seen since the beginning of the year.”

The pound fell for a third day versus the dollar, weakening 1.8 percent to $1.4551 by 1:30 p.m. in London, from $1.4822 yesterday. It dropped 0.9 percent to 91.05 pence per euro from 90.20 pence, and to 130.60 yen from 132.24.

The MSCI World Index dropped 1.8 percent, bringing its five-day decline to 6.6 percent. The FTSE 100 Index of U.K. shares fell 2 percent.

The average number of home sales per surveyor slipped to 10.1 in the fourth quarter, the lowest level in at least three decades, from 10.6 in the three months through November, according to the Royal Institution of Chartered Surveyors. Retail sales had the worst December in 14 years, a British Retail Consortium report showed.

Rate Assumptions

A separate report by the Department for Communities and Local Government today showed house prices fell an annual 8.6 percent in November, with values declining in all regions of the country.

The British economy contracted 1.5 percent in the fourth quarter, the most since 1980, the National Institute for Economic and Social Research said Jan. 10. The statistics office reported a 0.6 percent contraction in the third quarter.

The Bank of England reduced its benchmark interest rate to 1.5 percent last week, the lowest level in the bank’s history, to help counter the recession, the U.K.’s first in 17 years. Prime Minister Gordon Brown yesterday promised 500 million pounds to encourage hiring and bank lending.

“If we keep on getting these very weak numbers then you have to assume the Bank of England has to cut interest rate further, even if the impact is less at these kind of levels,” said Daragh Maher, deputy head of global foreign-exchange strategy in London at Calyon, the investment banking unit of Credit Agricole SA.

Gilts Decline

The pound’s 23 percent decline against the euro and 26 percent loss versus the dollar last year couldn’t prevent the U.K. trade deficit widening to a record in November as the global slump eroded demand for British products abroad. The trade gap was 8.3 billion pounds, compared with 7.6 billion pounds in October, the Office for National Statistics said today.

U.K. government bonds fell, pushing the yield on the 10- year gilt up three basis points to 3.17 percent. The 5 percent security due March 2018 slipped 0.26, or 2.6 pounds per 1,000 pound face amount, to 114.46. The two-year gilt yield was little changed at 1.55 percent.

The U.K. sold 3 billion pounds of 4.5 percent bonds due 2019 today, according to the Debt Management Office. Investors bid for 2.38 times the amount of securities offered, up from 1.6 times at the previous sale of the securities on Nov. 20. The average yield was 3.398 percent, the DMO said.

‘Robust’

“This morning’s 10-year gilt sale was quite robust,” Sean Maloney, a fixed-income strategist in London at Nomura International Plc, wrote in a research note. The result demonstrates “the ability of the market to take down record issuance going forward,” he said.

The government will issue almost 140 billion pounds of bonds in the year to March 31, more than double the amount sold last year and up from the 80 billion pounds it estimated in March.

Prime Minister Gordon Brown should “sack” the U.K. Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy, former Bank of England policy maker Charles Goodhart said today.

“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee today. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net