Pound Declines After BOE Minutes; Bank Offers Three-Month Funds

By Gavin Finch

Sept. 19 (Bloomberg) -- The pound fell against the dollar on speculation the Bank of England will be forced to cut interest rates next year.

The pound extended its drop, posting its second-biggest decline in almost two months, after the minutes of the central bank's last meeting showed policy makers were unanimous in holding borrowing costs at 5.75 percent. The Federal Reserve yesterday lowered its benchmark interest rate by a more-than- expected half percentage point to bolster the slowing economy.

``The Bank of England is going to need to follow the Fed and cut rates,'' said Kamal Sharma, a London-based currency strategist at Bank of America.

The U.K. currency fell to $1.9962 by 3:14 p.m. in London from $2.0131 late yesterday. The pound also dropped to 69.93 pence per euro, from 69.46 pence yesterday.

The U.K. currency was also hurt after the central bank today said it will auction 10 billion pounds ($20 billion) in a three- month money-market operation and widen the range of collateral it accepts. That's after Governor Mervyn King said last week that widening the collateral accepted by the bank or offering money for ``longer periods'' would risk ``moral hazard.'' News of the auction stoked speculation the credit squeeze may be worse than earlier assumed.

The minutes of the Sept. 6 rate-setting meeting today showed policy makers voted 9-0 in favor of keeping rates at a six-year high.

``The impact of financial-market disruption would depend on how long it persisted and how widespread it turned out to be,'' the minutes said. ``This was still very unclear.''

Inflation risks in the U.K. have ``probably receded'' since the central bank's forecasts on Aug. 8, the bank's panel said.

A U.K. government report yesterday showed annual inflation slowed to 1.8 percent in August, the lowest since March 2006 and below the Bank of England's's 2 percent target for a second month.

The yield on the 10-year gilt rose 2 basis points to 4.96 percent, while the two-year note yield fell 4 basis points to 5.14 percent. Yields move inversely to bond prices.


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