BLBG: Pound Rises Against Euro as BOE Cuts Interest Rate to 3 Percent
By Agnes Lovasz
Nov. 6 (Bloomberg) -- The pound rose against the euro and the dollar after the Bank of England cut its key interest rate by a greater-than-forecast 150 basis points, fueling optimism the faltering economy will recover faster than anticipated.
U.K. government bonds advanced as the nine-member Monetary Policy Committee, led by Governor Mervyn King, lowered the benchmark rate to 3 percent. None of the 60 economists surveyed by Bloomberg forecast a reduction of that size. Britain's economy contracted 0.5 percent in October after shrinking by the same amount in the third quarter, the National Institute of Economic & Social Research said today.
``The market is now looking to reward proactive central banks,'' said Geoff Kendrick, a senior strategist in London at UBS AG, the world's second-biggest foreign-exchange trader. ``Clearly, the global economy, especially the U.K., is in a recession. Rate cuts now mean that growth will be better down the track.''
The pound advanced to 80.30 pence per euro as of 12:27 p.m. in London, from 81.46 yesterday. It was at $1.6013, from $1.5910. The pound will rise to 79 pence per euro in a month's time, Kendrick predicted.
The U.K. economy is sputtering as the fallout from the global credit crisis batters lending to companies and consumers. House prices fell 13.7 percent in the three months through October from a year earlier, the most in at least 25 years, HBOS Plc, the nation's largest home-loan provider, said today.
`Serious Disruption'
``Since mid-September, the global banking system has experienced its most serious disruption in almost a century,'' the Bank of England said in a statement accompanying today's decision.
U.K. government bonds rose, with the yield on the two-year gilt, which is more sensitive to interest-rate changes, falling 18 basis points to 2.52 percent as of 12:30 p.m. in London. The 4.75 percent security due June 2010 advanced 0.28, or 2.8 pounds per 1,000-pound face amount, to 103.43. The 10-year yield declined 8 basis points to 4.33 percent. Bond yields move inversely to prices.
Bank of England Governor Mervyn King may need to lower the benchmark rate to zero from the current level of 4.5 percent, according to economists including former policy maker Charles Goodhart and Citigroup Inc.'s Michael Saunders.
``Markets are looking more concerned about the extent to which economies are in a recession and are looking to central banks to rescue the economic system,'' said Kamal Sharma, a currency strategist in London at JPMorgan Chase & Co., which forecast a 1 percentage-point cut today. Larger cuts ``could be positive for sterling. Aggressive central banks may actually be rewarded.''
To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net
