The pound fell against the euro, trading at the weakest level in more than two weeks, on speculation U.K. economic expansion may be slowing as the government cuts spending to curb Britain’s budget deficit. Sterling fell against all but one of its 16 most-traded counterparts after mortgage lender Halifax said U.K. house prices fell 0.6 percent in June, the most in four months. The Bank of England kept the key interest rate unchanged at a record low of 0.5 percent today, matching estimates in a Bloomberg survey. The yield on the March 2011 short- sterling futures contract was at 1.02 percent, within a basis point of its lowest this year. “The Halifax data certainly doesn’t help sterling,” said Adam Cole, head of global currency strategy at Royal Bank of Canada. “Tighter monetary-policy expectations are being rolled back because of the fiscal tightening.” The pound depreciated 0.5 percent to 83.62 pence per euro as of 12:02 p.m. in London after reaching 83.67 pence, the weakest since June 22. It was 0.3 percent lower at $1.5144. The pound climbed against the dollar on June 10, the last time Bank of England policy makers met, when they kept the main rate at 0.5 percent and maintained the bond-buying program. The pound’s rally since the formation of David Cameron’s coalition government has left the currency’s valuation looking “stretched” and may be fading, Cole said. Cameron’s Cuts Optimism the Cameron administration would reduce Britain’s budget deficit while sustaining economic growth pushed the pound up more than 6 percent against the dollar since reaching a low of $1.4231 on May 20. An endorsement of the government’s spending cuts by central bank Governor Mervyn King led investors to cut bets interest rates will increase this year. The Halifax data showed June house prices fell 0.6 percent after a revised 0.5 percent decline in May, the mortgage lending division of Lloyds Banking Group Plc said. Economists had estimated a 0.2 percent gain, according to the median of eight forecasts in a Bloomberg News survey. U.K. manufacturing output climbed 0.3 percent in May after a revised drop of 0.8 percent in April, twice the rate of decline previously estimated, according to data from the Office for National Statistics. Weaker economic data may strengthen King’s commitment to keep up economic stimulus. The governor may today have faced renewed dissent by Andrew Sentance, who on June 10 sounded the alarm on inflation and made the first push in almost two years to raise the benchmark interest rate. King said a week later that the economy is still languishing in the aftermath of the recession and the bank can expand bond purchases if needed. Chance of Recession “As long as there’s a chance of a return to a recession, interest rates will remain low,” said Elisabeth Afseth, an analyst at Evolution Securities Ltd. in London, said before the decision. “The possibility of more quantitative easing is always there but it’s by no means imminent.” The bank will maintain the bond purchase plan at 200 billion pounds, it said today. The 10-year gilt yield fell one basis point to 3.34 percent and the two-year yield was little changed at 0.77 percent. To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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