By Lukanyo Mnyanda Nov. 12 (Bloomberg) -- The U.K. pound dropped 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 pound also fell to the weakest versus the dollar since June 2002 as the central bank said the economy will shrink through most of next year and inflation will slow ``well below'' the 2 percent target. A government report today showed unemployment claims rose to the highest level since March 2001, adding to evidence the economy is deteriorating. ``The bleak outlook for the economy has led to a lot of disappointment and that's putting pressure on the pound,'' said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``Whichever way you look at it, there's no good news from the U.K.'' The pound traded as low as 84.12 pence per euro, the weakest since the single currency's introduction in 1999, and was at 83.82 by 4:27 p.m. in London. It fell to $1.4972, dropping below $1.50 for the first time since June 2002, from $1.5384. The pound may depreciate to 84 pence in the next ``couple of weeks,'' Karpowitz said. The U.K. currency declined 24 percent against the dollar and 12 percent versus 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. The inflation and growth projections ``courageous acknowledgment that they are definitely behind the curve and a quick action is definitely needed,'' Chiara Corsa, an economist at UniCredit MIB in Milan, wrote in a client note today. ``There is no room to wait. '' The number of people receiving jobless benefits 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 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. Rate Bets 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 30 basis points to 3.11 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. The pound dropped this year as the prospect of a recession caused investors' inflation expectations to fall, with the spread between the five-year gilt and its index-linked counterpart declining to the narrowest since at least 1996. The so-called breakeven rate was at 0.28 percentage points. It was 1.65 percentage points a month ago. The British currency's trade-weighted index dropped for an eighth day, falling 0.9 percent to 80.70, according to indexes compiled by Deutsche Bank AG, the world's biggest currency trader. The index fell to 80.43 on Oct. 24, the weakest since at least January 2000. ``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 forecast the pound will drop to 84.50 pence in the next week. ``We haven't found the bottom yet.'' King Comments Britain's currency stayed lower even as King said the central bank has ``no wish to see it fall very sharply.'' Its decline may ``help to pull the economy out of its slow period,'' the bank's Chief Economist Charles Bean said. U.K. two-year government notes rose, with the yield dropping 25 basis points to 2.29 percent. The 4.75 percent security due June 2010 gained 0.39, or 3.9 pounds per 1,000- pound ($1,501) face amount, to 103.76. The 10-year yield declined 11 basis points to 4.1 percent. Bond yields move inversely to prices. The difference in yield between the securities widened 15 basis points to 180 basis points, the most since at least 1999, reflecting investor preference for shorter-dated notes, which are more sensitive to the outlook for monetary policy. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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