By Agnes Lovasz and Lukanyo Mnyanda
Jan. 3 (Bloomberg) -- The pound fell to a record low against the euro after the Bank of England said lenders will reduce the supply of credit to consumers and companies in the first quarter, threatening to deepen the economic slowdown.
The U.K. currency also extended its first annual decline in three years on speculation a separate central bank report tomorrow will show consumers borrowed less and banks made fewer loans for house purchases in November, strengthening the case for an interest-rate cut. Futures prices showed traders have added to bets policy makers will lower the benchmark rate by June.
``The pound is suffering on expectations of both lower credit supply and demand,'' said Neil Jones, head of European hedge-fund sales in London at Mizuho Capital Markets. ``A reduction in credit should cause lower interest rates. Both are pound-negative features.''
Against the euro, the pound dropped to 74.82 pence, the lowest since the common European currency's introduction in 1999, and was at 74.52 pence by 3:25 p.m. in London, from 74.30 yesterday. It may fall to 74.9 pence this week, Stannard said.
The U.K. currency weakened to the lowest in more than a week versus the dollar, before trading at $1.9749, from $1.9808. It fell as much as 1.7 percent against the yen to a 1 1/2-year low, and was recently at 216.35, from 217.21 on Jan. 2.
Lenders curbed secured credit for U.K. households ``materially'' and cut debt to companies ``significantly'' in the past three months, the Bank of England said today in a quarterly survey conducted from Nov. 19 to Dec. 12. They plan to pare loans to those borrowers further, the report showed.
Home, Consumer Lending
Banks made 83,000 loans for house purchases in November, after approvals declined the most in 10 months in October, the central bank will say tomorrow, according to the median forecast of 17 economists surveyed by Bloomberg News. Consumers borrowed 1.2 billion pounds ($2.4 billion) in personal loans and overdrafts, down from 1.4 billion pounds, economists predict.
Signs credit in Europe's second-biggest economy is tightening came even as the cost of borrowing pounds for three months fell for a 13th day, suggesting central banks' efforts to revive interbank lending are working. The London interbank offered rate, or Libor, dropped 6 basis points to 5.83 percent the British Bankers' Association said.
U.K. retail stocks fell the most in seven years today after DSG International Plc said profit will miss analysts' estimates and Next Plc forecast a fourth year without same-store sales growth, adding to concern about consumer spending. The 20-member FTSE 350 General Retailers Index slid as much as 6.2 percent, its biggest decline since Jan. 11, 2001.
`Significant Underperformers'
``The pound is going to be one of the most significant underperformers this year,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA. ``Any signs of weakness in the U.K. housing market will add to those fears.''
Gilts erased earlier gains, with the yield on the two-year note little changed at 4.29 percent. The price of the 5.75 percent security due December 2009 slid 0.01, or 10 pence per 1,000-pound face amount, to 102.66. Yields move inversely to bond prices.
Britain's currency fell even as a report showed construction, which accounts for 6 percent of the economy, unexpectedly picked up last month from November's 14-month low.
The implied yield on the U.K. June interest-rate futures contract was little changed today at 5.17 percent, 14 basis points lower than when the central bank reduced its benchmark rate by a quarter percentage point to 5.5 percent on Dec. 6.
