The pound dropped to the lowest against the dollar in more than 2 1/2 years and government bonds advanced as a report showed U.K. industrial production unexpectedly declined in January. Sterling weakened for a fifth day against the U.S. currency, the longest losing streak since January, as manufacturing output also contracted. Gilts gained for a second day after the Royal Institution of Chartered Surveyors said house prices decreased in February. Two-year yields slid to the lowest level since September amid speculation the data will add weight to calls for more stimulus, or quantitative easing, by Bank of England policy makers. “Momentum is clearly against the pound and if anything serves as an excuse to carry on the market takes it,� said Derek Halpenny, European head of global-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The weak data back up renewed quantitative easing and it’s a clear recipe for further pound weakness.� The pound fell 0.1 percent to $1.4898 at 12:32 p.m. London time after sliding to $1.4832, the lowest level since June 23, 2010. Sterling was little changed at 87.55 pence per euro, after weakening as much as 0.4 percent. Bank of Tokyo-Mitsubishi forecasts the pound will slide toward $1.40 within a year and it may “easily� reach that level within a couple of months, Halpenny said. Output Declines Production fell 1.2 percent from December, according to the Office for National Statistics. The median forecast in a Bloomberg News survey of 29 economists was for a 0.1 percent increase. Manufacturing slipped 1.5 percent in January. An index of U.K. house prices declined to minus 6 last month from minus 4 in January, RICS said, citing a monthly poll of surveyors. The National Institute of Economic and Social Research publishes its estimate for February gross domestic product at 3 p.m. in London. The pound has depreciated 6.6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.7 percent and the dollar gained 3 percent. The benchmark 10-year gilt yield decreased six basis points, or 0.06 percentage point, to 1.96 percent. The 1.75 percent bond due in September 2022 rose 0.47, or 4.70 pounds per 1,000-pound face amount, to 98.185. The rate on two-year gilts slipped as low as 0.18 percent, the least since Sept. 28. King Outvoted The Monetary Policy Committee held its asset-purchase target at 375 billion pounds last week, a month after Governor Mervyn King and two other MPC members were outvoted in an attempt in a push for more stimulus. The next policy meeting will be on April 3-4. “With some MPC members already convinced that some fine- tuning of QE, with additional 25 billion pounds, could be of some support for the sluggish economy, further weakness in hard data might lead to a vote for more QE already in April,� Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in an e-mailed note after the output reports. Money markets are factoring in a 25 basis-point cut in the central bank’s main rate by December, according to sterling overnight index average forwards, Tullett Prebon Plc data show. The central bank’s key interest rate has been at a record-low 0.5 percent since March 2009. The Bank of England plans to buy longer-dated gilts today as it reinvests the proceeds of its asset-purchase program. The central bank said on March 7 it will purchase gilts with a residual maturity of three to seven years on Mondays, of more than 15 years on Tuesdays, and of seven to 15 years on Wednesdays. This reinvestment is a “supporting factor� for gilts, acting as a mini form of quantitative easing, Lloyds Banking Group Plc strategists led by Charles Diebel in London wrote in an e-mailed note today. Gilts lost 1.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 0.9 percent and Treasuries fell 1.1 percent. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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