Pound Falls as CBI Says Economy Set for Worst Slump Since 1980

By Lukanyo Mnyanda

Feb. 16 (Bloomberg) -- The pound fell against the dollar after the U.K.’s biggest business lobby said the economy will contract this year at almost twice the pace previously forecast, making it more likely interest rates will fall to near zero.

The U.K. currency also declined after Group of Seven finance chiefs avoided any reference to the pound in statements following their weekend meeting in Rome, indicating government action to limit its losses is unlikely. Gross domestic product will shrink 3.3 percent, the most in almost 30 years, instead of the 1.7 percent predicted in November, the Confederation of British Industry said today. Stocks dropped, boosting demand for the safest assets.

“There’s still a strong bearish element to the pound and people believe it needs to be sold,” said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank. “With the gradual decline in rates, we’ve seen an exodus from sterling.”

The pound slipped 0.6 percent to $1.4262 as of 9:25 a.m. in London, from $1.4355 on Feb. 13. It traded at 89.66 against the euro, from 89.63 last week. It fell 0.6 percent to 130.10 yen, from 130.71.

The pound may decline to $1.30 and reach parity with the euro during the second quarter, Jones said.

The average house price advertised by sellers in February recorded the biggest annual decline since at least 2002, Rightmove Plc said today, indicating the housing slump sparked by the collapse in credit markets is deepening.

‘No Mention’

The Bank of England reduced the bank rate to 1 percent on Feb. 5, the lowest level since the central bank was founded in 1694. It will cut the main rate another 50 basis points at a policy meeting on March 5, according to the median forecast of 26 economists surveyed by Bloomberg.

The pound fell 17 percent versus the euro in the past 12 months and 27 percent against the dollar.

There was “no mention, discussion of the pound” at the G-7 meeting, Callum Henderson, head of global currency strategy, and Thomas Harr, senior currency strategist, at Standard Chartered Plc in Singapore, wrote in a research note today. “This may prove negative for sterling. Euro-pound in particular is likely to bounce on the back of this omission.”

U.K. stocks fell for a third day, with the FTSE 100 Index declining 0.3 percent amid speculation Lloyds Banking Group Plc may require further capital. The bank’s shares dropped as much as 22 percent.

U.K. bonds rose, with the 10-year gilt dropping one basis point to 3.54 percent. The 4.25 percent security due March 2019 rose 0.9, or 90 pence per 1,000 ($1,423) face amount, to 108.10. Yields move inversely to bond prices.

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