Pound slumps after grim British economic news

LONDON - The pound slumped Thursday to a historic low against the euro and to its lowest level against the dollar in over six and a half years after further grim economic news fueled expectations that the Bank of England will slash interest rates later.

The pound, which has been languishing in recent months amid mounting fears about the state of the British economy, slid further on the news that new car sales and house prices plunged during November.

It dropped around 2 percent to $1.4467 Thursday, its lowest level since mid-April 2002. As recently as July, the pound was trading at over $2. Against the euro, the pound fell to 0.8675 pounds, its lowest since the single currency was introduced in 1999.

The latest bout of pound selling came as the Halifax, Britain's biggest mortgage lender, said house prices fell by 2.6 percent in November from the previous month, following on from a 2.4 percent decline in October.

November's decline — the tenth in a row — was the biggest since September 1992 when house prices fell a monthly 3.0 percent during the middle of the last housing crash in Britain.

On a three-month year-on-year basis, house prices fell 14.9 percent, their biggest fall since the Halifax survey started in 1983.

New car sales figures also weighed on the pound. The Society of Motor Manufacturers and Traders said they fell 37 percent in November compared to the same month in 2007, with total sales hovering just above 100,000.

Analysts said the latest data will add pressure on rate-setters to deliver a big interest rate cut at 1200 GMT. Most think the Bank of England will lower its rate a whole percentage point to 2.00 percent, which would be equal to its lowest since the bank was founded in 1694. Rates were last at 2 percent in 1951.

However, many think that the scale of the downturn in the economy means the bank should cut interest rates by a second consecutive 1.50 percentage points, which would take the benchmark rate to 1.50 percent, its lowest level ever.

Willem Buiter, a former member of the Bank's rate-setting committee, said earlier on BBC Radio 4 that there was no reason why interest rates should not fall to zero in the very near future.

"Since we know we're going to get to zero, there's very little point in keeping the powder dry by delaying it," he said.

The prospect of sharply lower rates has weighed on the pound in recent months as lower rates can weigh on a country's currency by reducing yields on interest-bearing investments as investors take their money elsewhere. Over the last few years, the pound benefited from the fact that British interest rates were generally higher than for other major currencies.

"Even if we see an aggressive interest rate cut later from the Bank, the pound is likely to remain under pressure," said Ian Stannard, currency strategist at BNP Paribas.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.