The pound tumbled below $1.53 in its biggest drop in at least 37 years after a report showed the UK economy contracted more than forecast in the third quarter, bringing the nation to the brink of a recession.
The decline surpassed that of Black Wednesday in September 1992, when the UK was driven out of Europe’s Exchange Rate Mechanism. Gross domestic product contracted 0.5 per cent in the three months through September, the Office for National Statistics in London said today, more than the 0.2 per cent forecast by analysts in a Bloomberg survey. The FTSE 100 index slumped as much as 9.1 per cent and the yield on the UK 10-year gilt headed for its biggest weekly decline in a decade.
“This is once-in-a-lifetime stuff, we’re all sat under our desks with tin hats on,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. “The UK is in the first step toward a recession and the dollar’s bid because of repatriation flows.”
The UK currency fell to $1.5269, the lowest level since August 2002, and was at $1.5282 at 10:39 am in London, from $1.6230 yesterday. Against the euro, the pound weakened to a record 81.96 pence, dropping for a fifth day, from 79.69 pence.
A collapse in credit markets and the worst housing slump in a generation have buffeted the British economy, Europe’s second-biggest. The UK is already in a recession and the economy will contract for the next three quarters, Ernst & Young’s ITEM Club, which uses the same forecasting model as the Treasury, said in a report on October 20.
‘Black Wednesday’: Today’s decline brought this week’s drop versus the dollar to 11.5 per cent. The currency lost 9.8 per cent in the week when billionaire investor George Soros and other speculators drove it out of the Exchange Rate Mechanism that linked the currency to the deutschmark. The then-UK Prime Minister John Major pulled the pound out of the ERM on September 16, 1992. Current Prime Minister Gordon Brown, formerly Chancellor of the Exchequer, described that day as “Black Wednesday”.
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“If anyone had forecast a 10-cent change in the pound this week, it would have been a complete punt,” said Paul Robinson, a London-based foreign-exchange analyst for Barclays Capital.
House prices will continue to fall and the pound may depreciate further, King said in a speech to executives in Leeds, England on October 21.
Prime Minister Brown predicted the next day that the UK will slip into a recession for the first time since he took charge of Britain’s finances in 1997. The remarks were Brown’s first admission that the country's longest unbroken streak of economic growth in more than a century is over.
“The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,” King said. The Monetary Policy Committee “will act promptly to ensure that inflation remains on track to meet our target”.
Rate-Cut Bets: Traders are starting to speculate the Bank of England will lower its benchmark interest rate by as much as three-quarters of a percentage point by year-end to revive the economy. The odds of a cut of that magnitude were 5 per cent yesterday, a Credit Suisse Group AG index of derivatives showed.
Government bonds rose, with the yield on the two-year gilt falling 15 basis points to 3.08 per cent. The 4.75 per cent note maturing June 2010 climbed 0.23, or 2.3 pounds per 1,000-pound ($1,530) face amount, to 102.60. The yield on the 10-year security dropped 15 basis points to 4.32 per cent, on course for its biggest weekly decline since at least 1998. Bond yields move inversely to prices.