Thursday, March 20, 2008


U.K. Pound Falls After BOE Minutes Show 7-2 Rate-Decision Split

March 19 (Bloomberg) -- The pound fell against the euro and the dollar after the minutes of the Bank of England rate-setting meeting showed two policy makers voted to cut borrowing costs.

The U.K. currency dropped, and government bonds rallied, after HBOS Plc, Britain's biggest mortgage lender, plummeted by as much as 17.1 percent in London and denied it had ``liquidity problems.'' Central bank policy makers voted 7-2 to keep the benchmark interest rate at 5.25 percent on March 6, with John Gieve and David Blanchflower dissenting, minutes of the meeting released today showed.

``The pound is being tarred with the same brush as the dollar,'' said Jeremy Stretch, a currency strategist at Rabobank, the third-largest Dutch bank. ``The U.K. has a very significant financial system of great importance to the overall economy. The system is suffering great distress, that's quite clear.''

Britain's currency fell as much as 1.4 percent to 78.94 pence per euro, and was at 78.82 by 4:40 p.m. in London, from 77.88 yesterday. It dropped to $1.9855, from $2.0064, the third day it has traded below $2.

The Bank of England will host a meeting of banking executives tomorrow as officials struggle to ease concern about the health of the country's financial system.

``Senior members of the banking community'' will attend the meeting in London, Lesley McLeod, a spokeswoman for the British Bankers' Association, said in an interview.

U.K. stocks fell, led by HBOS, on speculation the lender may have funding problems. Royal Bank of Scotland Group Plc also fell.

`No Liquidity Problems'

``There are no liquidity problems,'' HBOS spokesman Shane O'Riordain said in a telephone interview today. ``We have ready access to a deep pool of deposits. We can access the wholesale markets whenever we feel appropriate to do so.''

HBOS has declined by a third in the past three weeks on concern it may be vulnerable to writedowns and higher inter-bank lending costs. Pressures on short-term funding forced Bear Stearns Cos. to agree to a takeover by JPMorgan Chase & Co. this week to stave-off collapse.

The difference between what the U.K. government and banks pay to borrow for three months, a gauge of the availability of funds in the British money markets, rose to a record 179 basis points, from 158 basis points a week earlier. The spread averaged 11 basis points in the first half of 2007.

Barclays Plc, Lehman Brothers Holdings Inc., Investec Securities and BNP Paribas SA brought forward forecasts for the next Bank of England rate cut on signs support for a reduction is building among policy makers.

The key rate will drop to 5 percent on April 10, instead of at the central bank's meeting in May, London-based economists from the banks wrote in notes to clients today.

U.K. government bonds rallied as stock-market losses across Europe stoked investor demand for the safest assets.

The yield on the two-year gilt fell 6 basis points to 3.69 percent. The price of the 5.75 percent security due December 2009 advanced 0.10, or 1 pound per 1,000-pound ($1,996) face amount, to 103.38.

No comments: