By Agnes Lovasz Nov. 4 (Bloomberg) -- The pound fell to its lowest level in almost a week against the euro after an industry report showed construction shrank last month, giving the Bank of England more reason to cut interest rates. The U.K. currency declined for a third day as the building industry, accounting for 6 percent of the economy, contracted at the fastest pace in more than a decade, adding to evidence the economy has entered a recession. 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 fell to 81.05 pence per euro, the weakest since Oct. 27, before trading at 80.94 as of 5:24 p.m. in London, from 79.91 pence yesterday. It was at $1.6081, from $1.5818. The Chartered Institute of Purchasing and Supply's index of construction declined to 35.1 last month, from 38.8 in September. Economists surveyed by Bloomberg had expected a reading of 37.8 forecast. U.K. manufacturing shrank for a sixth month in October, the institute said yesterday. Royal Bank of Scotland Group Plc, one of the banks nationalized by the government, abandoned its full-year profit forecast as credit-market losses worsened and bad loans rose. The Edinburgh-based company said today it wrote down 1 billion pounds ($1.6 billion) in October against assets tied to Lehman Brothers Holdings Inc. and Icelandic banks. Steep Decline Evidence that Europe's second-largest economy is entering its first recession since the early 1990s caused the pound to lose 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. A government report showed Britain's economy shrank a greater-than-forecast 0.5 percent in the third quarter. Mounting speculation that policy makers led by Governor Mervyn King will cut interest rates further pushed the implied yield on the December short-sterling futures contract 43 basis points lower in the past week to 4.18 percent today. Gilts Rise U.K. government bonds rose, driving the yield on the two- year gilt down 7 basis points to 2.80 percent. The 4.75 percent security due June 2010 advanced 0.1 or 1 pound per 1,000-pound ($1,607) face amount, to 103.01. The 10-year note yield fell 2 basis points, to 4.47 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 1.67 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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