By Lukanyo Mnyanda Nov. 20 (Bloomberg) -- The U.K. pound dropped and government bonds rose after retail sales fell for a second month, raising the likelihood policy makers will cut borrowing costs to kickstart Britain’s faltering economy. The currency declined the most in a week versus the euro as the Office for National Statistics said sales shrank 0.1 percent last month. The Bank of England signaled yesterday it’s prepared to cut interest rates further, after reducing the main rate 1.5 percentage points to the lowest level since 1955. “The economic outlook is still negative for the pound,” said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank AG, Germany’s second-biggest lender. “The huge rate cuts and bad fundamentals are considerably negative.” The pound fell to $1.4836 as of 10:35 a.m. in London, from $1.4952 yesterday, when it reached the highest level since Nov. 12. The U.K. currency is down 25 percent against the dollar this year. Against the euro, it weakened to 84.32 pence, snapping a four-day gain, from 83.55 pence. It reached a record low of 86.63 pence last week. The pound may drop to $1.45 against the dollar in the “next couple of days,” said Praefcke, who also recommends investors sell it against the Japanese yen as global growth slows. The pound lost 1 percent to 141.82 yen today. U.K. policy makers, led by Governor Mervyn King, considered a bigger reduction in the key interest rate on Nov. 6, according to minutes of their meeting released yesterday. The central bank discussed the need for a cut to less than 2.5 percent, the minutes showed. It settled on a reduction to 3 percent. Rate-Cut Prospects The decline in retail sales was less than the 0.9 percent median forecast in a Bloomberg News survey of 27 economists. Household goods stores led the monthly drop as shoppers bought fewer electrical items, the statistics office said. Investors increased bets on rate cuts. The implied yield on the short-sterling December futures contract dropped seven basis points to 3.37 percent today, bringing its decline since Oct. 31 to 87 basis points. Policy makers “will do whatever to ensure that inflation remains close to our target,” Bank of England Chief Economist Spencer Dale said in an interview published in the Newcastle Journal today. The yield on the 10-year gilt slipped below 4 percent for the first time since January 2006, falling nine basis points to 3.95 percent. The 5 percent security due March 2018 advanced 0.71, or 7.1 pounds per 1,000-pound ($1,485) face amount, to 108.07. The yield on the two-year note decreased 10 basis points to 2.04 percent. Yields move inversely to bond prices. The government today sold 3 billion pounds of 4.50 percent notes maturing in March 2019 to yield an average 4.14 percent. Investors bid for 1.6 times the securities offered, down from 2.19 times at the auction of the same bonds on Sept. 25. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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