Pound in biggest rise on euro since debut in 1999
The pound rose as much as 3.4pc to 92.51p per euro. Matt Cardy/Getty Images
The UK pound rose the most against the euro since the debut of the common currency a decade ago on bets the ECB may be spurred to cut interest rates to limit the fallout from the recession.
ECB vice-president Lucas Papademos said yesterday that further rate cuts may be needed should inflation keep slowing. The pound also gained versus the dollar on speculation the British government may guarantee asset-backed securities to encourage banks to lend, said Hans-Guenter Redeker at BNP Paribas SA in London.
"Europe is going to provide a lot of negative news going forward," said Redeker, global head of foreign exchange strategy at BNP Paribas. There "has been talk of this government discussion concerning providing a guarantee for asset-backed securities", and this was positive for sterling, he said.
The pound rose as much as 3.4pc to 92.51p per euro, strengthening to less than 93p for the first time since December 22. The UK currency gained 0.5pc to $1.46, rebounding from a drop of as much as 0.8pc.
The euro-area economy is likely to "remain weak" this year and may even contract in the first half, Mr Papademos said yesterday. While inflation could "drop considerably" around the middle of the year, the risk of deflation is "nil", he said.
Bank of England Governor Mervyn King may follow the US Federal Reserve and pursue other ways of pumping money into the British economy, such as expanding the £200bn programme that allows banks to swap illiquid securities for government debt, economists said.
Lending
UK Prime Minister Gordon Brown promised yesterday to create as many as 100,000 jobs and renewed efforts to spur bank lending.
The pound slid 23pc against the European currency last year, its biggest decline since the euro came into existence in 1999, as the Bank of England cut rates faster than the ECB and the British economy entered its first recession in 17 years.
Policymakers will probably cut the benchmark interest rate to 1.5pc from 2pc on January 8, the lowest level in the bank's three-century history, according to the median forecast of 57 economists in a Bloomberg News survey.
A separate Bloomberg survey predicts the ECB will cut rates to 1.5pc by the end of the second quarter, from 2.5pc.
"Euro-sterling could see a significant decline," said Mr Redeker, who predicts the pound strengthening to 90p per euro by the end of March and to 84p by year-end. (Bloomberg)
