The pound fell against the euro after the Confederation of British Industry lowered its economic growth estimates for the U.K. and a report showed house prices unexpectedly fell the most in seven months in April. Sterling declined versus most of its 16 major peers, losing most against the Swedish krona. Gross domestic product will rise by 1.7 percent in 2011 compared with a February estimate of 1.8 percent, while expansion next year will be 2.2 percent instead of 2.3 percent, Britain’s biggest employers’ group said in quarterly forecasts released today. “The data has been weak and the problem is that we haven’t yet seen the full impact of the fiscal cuts on the economy,” said Sarah Hewin, a senior economist at Standard Chartered Bank in London. “That means the data is likely to get worse, which will allow the Bank of England to keep rates steady for longer. That will certainly keep the pound under pressure.” The pound weakened 0.6 percent to 87.96 pence per euro as of 12:48 p.m. in London. It was little changed at $1.6373 and climbed 0.2 percent to 132.24 per yen. U.K. house prices contracted 1.4 percent in April from the previous month, compared with 0.1 percent growth estimated in a Bloomberg survey, a report from London-based Halifax showed. The Bank of England kept its benchmark interest rate unchanged at a record low 0.5 percent on May 5 to boost the economy, which grew 0.5 percent in the first quarter after a similar-magnitude contraction in the final three months of last year. Slowing economic growth comes as Britain implements the deepest government spending cuts since World War II, threatening to drag output lower. Inflation Target The central bank’s monetary policy stance is also being complicated by inflation, which is accelerating at twice its 2 percent target. Inflation unexpectedly eased to 4 percent in March, following five months of acceleration to a more than two- year high of 4.4 percent in February. “Growth will remain weak and we see no rate hike in 2011,” said Hewin. “Rate hikes have been pushed back. We see the first rate hike in the first quarter of 2012.” Money markets are factoring in a 25 basis-point increase in the central bank’s main rate by year-end, according to sterling overnight index average forwards, Tullett Prebon Plc data show. U.K. government bonds were little changed, with the yield on the 10-year gilt at 3.38 percent. The two-year note yielded 1 percent, one basis point lower than the previous close. Short-sterling futures rose, lowering the implied yield on the contract expiring in March 2012 by three basis points to 1.23 percent, as traders pared bets for expected rate increases next year. To contact the reporter on this story: Garth Theunissen in London at gtheunissen@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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