By Lukanyo Mnyanda Nov. 12 (Bloomberg) -- The U.K. pound fell to an all-time low against the euro after Bank of England Governor Mervyn King signaled policy makers will add to interest-rate cuts to revive the slumping economy. The British currency also dropped to the lowest level versus the dollar since August 2002. The economy will shrink through most of next year and inflation will drop ``well below'' the 2 percent target, the central bank said today. Unemployment claims rose to the highest level since March 2001, the Office for National Statistics said. Reports yesterday showed retail sales shrank for the first time since April 2005 and home sales slid to the lowest level in at least three decades. ``In this kind of environment it's going to be hard for sterling to shrug off the negative mindset,'' said Gavin Friend, a strategist in London at National Australia Bank Ltd. who recommends investors sell the pound against the euro. ``We haven't found the bottom yet.'' The pound traded as low as 82.38 pence per euro, the weakest since the single currency's introduction in 1999, and was at 82.29 by 11:25 a.m. in London. It fell to $1.5234, from $1.5384. The pound may depreciate to 84.50 pence in the next week, Friend said. The U.K. currency declined 23 percent against the dollar and 10 percent against the euro this year as the fallout from the global credit crisis batters Europe's second-largest economy. Gross domestic product may contract 0.3 percent in 2009, economists at Morgan Stanley wrote in a research note yesterday. It shrank 0.5 percent in the third quarter. Shrinking Economy The economy will contract by an annual 1.8 percent in the first three months of the year, according to forecasts from the central bank today. ``We are certainly prepared to cut bank rate if that proves to be necessary,'' King said at a press conference in London. Unemployment rose 36,500 in October to 980,900, the ninth monthly increase, the statistics office said earlier. The median of 29 estimates in a Bloomberg News survey predicted a 40,000 increase. The unemployment rate rose to 3 percent last month, the highest since October 2006, from 2.9 percent. Traders raised bets the Bank of England will add to interest-rate cuts to buoy the economy. The implied yield on the short-sterling December futures contract fell 15 basis points to 3.26 percent. Policy makers trimmed the benchmark rate last week by 1.5 percentage points to the lowest level since 1955. The 3 percent main rate compares with 3.25 percent in the euro region and 1 percent in the U.S. `Aggressive Rate Cuts' The inflation and growth projections ``should open the door to further aggressive rate cuts,'' Chiara Corsa, an economist at UniCredit MIB in Milan, wrote in a client note today. ``There is plenty of room for further cuts.'' U.K. two-year government notes rose, with the yield dropping 13 basis points to 2.44 percent. The 4.75 percent security due June 2010 gained 0.19, or 1.9 pounds per 1,000- pound ($1,538) face amount, to 103.53. The 10-year yield declined 7 basis points to 4.14 percent. Bond yields move inversely to prices. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Source