By Agnes Lovasz Nov. 4 (Bloomberg) -- The pound fell against the euro after an industry report showed construction shrank last month, adding to evidence Britain's economy has entered a recession and giving the Bank of England more reason to cut interest rates. The U.K. currency declined for a third day as the report showed the building industry, accounting for 6 percent of the country's economy, contracted at the fastest pace in more than a decade. Policy makers will lower the main rate by 50 basis points to 4 percent in two days, a Bloomberg survey showed. The economy will contract 1 percent next year, the European Commission said yesterday. ``We still see the pound as vulnerable in the current climate,'' Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut, wrote in a report to clients. ``We now expect rates to fall to 2 percent in the upcoming quarters as aggressive cuts are needed to help the economy recover.'' The pound weakened to 80.60 pence as of 11:20 a.m. in London, from 79.91 pence yesterday. It was at $1.5814, from $1.5818. Evidence that Europe's second-largest economy is entering its first recession since the early 1990s is battering the pound as traders raise bets policy makers will slash borrowing costs. The currency fell 9.7 percent versus the dollar in October, the steepest monthly decline since 1992. The Bank of England cut the benchmark rate on Oct. 8 in concert with other major central banks in an effort to avoid a collapse of the global financial system. Britain's economy shrank a greater-than-forecast 0.5 percent in the third quarter, a government report showed last month. Company Failures Failures by small U.K. companies may jump 41 percent by the end of next year from 2007, the Financial Times said today, citing a survey by R3, a trade body for insolvency practitioners. Royal Bank of Scotland Group Plc abandoned its full-year profit forecast as credit-market losses worsened and bad loans rose. The Edinburgh-based company said it wrote down 1 billion pounds ($1.6 billion) in October against assets tied to Lehman Brothers Holdings Inc. and Icelandic banks. The government will own as much as 60 percent of the lender under its bank bailout program unless investors buy some of the 20 billion pounds of stock it plans to sell later this year. The Chartered Institute of Purchasing and Supply's index of construction declined to 35.1 last month, from 38.8 in September. The October reading was lower than the 37.8 forecast in a Bloomberg survey of six economists. The institute said yesterday U.K. manufacturing shrank for a sixth month in October. Rate Bets Mounting speculation that the Bank of England Governor Mervyn King will cut interest rates pushed the implied yield on the December short-sterling futures contract 46 basis points lower in the past week to 4.15 percent today. U.K. government notes rose, driving the yield on the two- year gilt down 6 basis points to 2.82 percent. The price of the 4.75 percent security due June 2010 advanced 0.08, or 80 pence per 1,000-pound ($1,583) face amount, to 102.97. The 10-year note yielded 4.52 percent. Bond yields move inversely to prices. The outperformance of shorter-dated debt pushed the difference in yield, or spread, between two- and 10-year notes to 1.70 percentage points today, the most in 12 years. The U.K. sold 2.25 billion pounds of 4.75 percent bonds due December 2030 today, at an average yield of 4.95 percent. Demand exceeded the notes on offer by about 1.4 times. To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net;

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