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Pound Falls, Gilts Rise on Central Banker’s Recession Concern

Aug. 24 (Bloomberg) -- The pound fell to its weakest level in a month against the dollar as a Bank of England policy maker said the U.K. economy may slip back into a recession.

Sterling snapped four days of gains versus the euro. There is a “real risk” of a second recession, Martin Weale was quoted by the London-based Times as saying in an interview. U.K. lenders approved fewer mortgages last month than economists predicted, British Bankers’ Association data showed today. U.K. 10- and two-year gilt yields slid to record lows as stock losses boosted demand for the relative safety of fixed income.

“The comments have had a visible impact on sterling across the board,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. “For sterling the situation is looking more difficult. If risk aversion continues to weigh on the market, the pound will suffer.”

The pound depreciated 0.4 percent to $1.5447 as of 4:21 p.m. in London, after sliding to $1.5373, the lowest level since July 23. It was 0.6 percent weaker at 82.05 pence against the euro, after reaching its strongest level since June 30 yesterday. It slumped 1.8 percent to 129.76 yen, after earlier slipping to 128.80 yen, the lowest since May 25.

The 10-year gilt yield decreased 10 basis points to 2.88 percent, after earlier sliding to 2.85 percent, the lowest since at least 1989, according to Bloomberg generic prices. The two-year gilt yield fell five basis points to 0.59 percent and was as little as 0.56, the least since Bloomberg started compiling data on the security in 1992.

‘Significant Chance’

The Bank of England’s latest economic forecasts are “putting a significant chance on the economy contracting over a four-quarter period,” Weale said, according to the Times. A new financial crisis is a danger that “can’t be regarded as trivial,” he said.

Mortgage approvals fell to 33,698 in July from a revised 34,575 in June, the BBA said today. The median prediction of eight economists polled by Bloomberg was for a decline to 34,000. Banks approved 41,353 loans to buy houses in July 2009.

The benchmark FTSE 100 Index of stocks lost 1.5 percent, for its fourth decline of the past five trading days. The Stoxx Europe 600 Index lost 1.7 percent.

Sterling may trade at $1.52 by the end of September, Mialich said. The median of 32 analysts’ estimates compiled by Bloomberg is for the pound to end the third quarter at $1.53.

The currency has declined 1.3 percent against its U.S. peer since Aug. 11, when the central bank lowered its 2012 growth forecast to 3 percent from 3.6 percent, citing “tight credit conditions” and planned budget cuts by the government.

Gilts Returns

Gilts returned 8.9 percent this year, compared with a gain of 9.2 percent for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries handed investors 8.3 percent.

The extra yield investors demand to hold five-year gilts instead of German notes of a similar maturity was at 36.9 basis points today, the least since Jan. 4.

“The BOE continues to surprise dovish with MPC member Weale’s comments overnight the latest iteration,” Ray Farris, head of foreign-exchange strategy at Credit Suisse Group AG in London, wrote in a note. “This is depressing U.K. yields.”

Investors and dealers want the government to delay an offering of bonds through banks planned for next month, the Debt Management Office said.

A sale of conventional bonds through a syndicate of banks near the end of October was “widely seen as the preferred operation,” with the existing securities maturing in 2040 and 2060 most commonly mentioned candidates, the London-based debt agency said today in the minutes of a meeting held yesterday.

The debt office reduced the amount of bonds it’s planning to sell in the fiscal year through March to 165 billion pounds ($254 billion) from 185.2 billion pounds after Chancellor of the Exchequer George Osborne unveiled his emergency budget in June and pledged to cut spending.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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