BLBG: Pound Falls as CBI Says Economy Set for Worst Slump Since 1980
The pound fell against the dollar after the U.K.’s biggest business lobby said the economy will contract at almost twice the pace previously forecast, giving the central bank more cause to cut interest rates to near zero.
The U.K. currency also declined after Group of Seven finance chiefs avoided any reference to it in the statements after their weekend meeting in Rome, indicating policy makers won’t seek to limit the pound’s losses. Gross domestic product will shrink 3.3 percent, the most in almost 30 years, instead of the 1.7 percent predicted in November, the Confederation of British Industry said today. Stocks dropped, boosting demand for the safest assets.
“There’s still a strong bearish element to the pound and people believe it needs to be sold,” said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank. “With the gradual decline in rates, we’ve seen an exodus from sterling.”
The pound weakened 0.7 percent to $1.4251 by 11:44 a.m. in London and fell 0.8 percent to 130.78 yen. It was little changed at 89.61 against the euro.
The pound may decline to $1.30 and reach parity with the euro during the second quarter, Jones said.
The average U.K. house price advertised by sellers in February recorded the biggest annual decline since at least 2002, Rightmove Plc said today, indicating the housing slump sparked by the collapse in credit markets is deepening.
‘No Mention’
Policy makers reduced the bank rate to 1 percent on Feb. 5, the lowest level since the Bank of England was founded in 1694. It will cut the main rate another 50 basis points on March 5, according to the median forecast of 26 economists surveyed by Bloomberg.
The pound fell 17 percent versus the euro in the past 12 months and 27 percent against the dollar.
There was “no mention, discussion of the pound” at the G-7 meeting, Callum Henderson, head of global currency strategy, and Thomas Harr, a senior currency strategist, at Standard Chartered Plc in Singapore, wrote in a research note today. “This may prove negative for sterling. Euro-pound in particular is likely to bounce on the back of this omission.”
U.K. stocks fell for a third day, with the FTSE 100 Index declining 0.4 percent amid speculation Lloyds Banking Group Plc may require further capital. The bank’s shares dropped as much as 22 percent.
Vulnerable Economy
The U.K.’s longest expansion in more than a century came to an end in the second quarter of last year with the economy recording zero growth, before contracting in the third and fourth quarters. Britain faces the worst recession among G-7 nations, according to International Monetary Fund forecasts.
“The vulnerability of the economy suggests that the pound should depreciate further in the medium term,” analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas, wrote in a client note today. The U.K. currency may drop to $1.40 by the end of March and trade as low as $1.26 during the second quarter, according to BNP Paribas.
Unemployment will rise to more than 3 million by the second quarter of 2010, up from 1.97 million at the end of last year, while the inflation rate will drop to 0.1 percent in the third quarter of this year, the CBI said. A government report tomorrow will probably show prices rose an annual 2.7 percent last month, from 3.1 percent in December, according to a Bloomberg survey of economists.
U.K. bonds climbed, with the 10-year gilt yield dropping four basis points to 3.51 percent. The 4.25 percent security due March 2019 rose 0.37, or 3.7 pounds per 1,000 ($1,424) face amount, to 108.30. Yields move inversely to bond prices.
