Pound Falls Against Dollar on Signs House-Price Growth Slowing

By Anchalee Worrachate

Sept. 13 (Bloomberg) -- The pound fell versus the dollar as a survey showing U.K. house prices declined in August for the first time since 2005 stoked speculation three Bank of England interest-rate increases this year are slowing property gains.

The number of real-estate agents saying house prices fell exceeded those reporting gains by 1.8 percentage points, the Royal Institution of Chartered Surveyors said. The pound is near a four-month low versus the euro as higher borrowing costs from the U.S. subprime loan slump prompt traders to cut bets the U.K. central bank will lift rates again this year.

``We still expect the BOE to leave rates on hold over the next few months,'' said Nick Bate, economist at Merrill Lynch & Co. in London who used to work for the Treasury. ``With the underlying growth in the economy expected to weaken going forward, and inflation risk abating, we think the bank may cut rates towards the middle of 2008.''

The pound slipped to $2.0256 by 8:23 a.m. in London, from $2.0292 yesterday. It was also at 68.56 pence per euro, compared with 68.51 pence.

BOE Governor Mervyn King indicated yesterday the bank is reluctant to bail out the financial markets as it would encourage risk behavior in the future. His comments fuelled speculation the lending drought will drag on, hurting the economy and forcing it to cut rates.

The three-month rate banks charge each other for pounds held at its highest in nine years after King's comments.

Gilt Sale

Gilts gained before a five-year bond auction today. The Debt Management Office will sell 2.5 billion pounds of the 5.25 percent gilt maturing in June 2012.

Two-year gilt yields fell 2 basis points to 5.02 percent in London. The 10-year yield also slipped 2 basis points to 4.87 percent.

The yield on the December interest-rate futures contract fell 4 basis points to 6.36 percent. The March 2008 contact yield declined 5 basis points to 5.86 percent, indicating investors believe the BOE may cut rates next year.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the central bank's key rate for the past decade.

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