The pound fell to a record 98 pence per euro for a second day, edging toward parity with the common currency, on speculation the Bank of England will cut interest rates faster than the European Central Bank. The pound also slid to an all-time low versus a currency basket of its main trading partners. The U.K. central bank reduced its main rate 350 basis points this year to limit the fallout from the global financial crisis. The ECB will end 2008 with its key rate 150 basis points lower than at the start, with some policy makers indicating they may be reluctant to lower borrowing costs again next month. “The Bank of England is making it clear that rates will go close to zero in due course, whereas the ECB is saying hang on, we may not cut in January,” said Brian Hilliard, director of economic research at Societe Generale SA in London. “In the race to zero, the Bank of England will win.” The pound weakened as much as 1.3 percent to 98 pence per euro, before trading at 97.83 pence as of 2:32 p.m. in London, from 96.71 pence yesterday. The U.K. currency is 25 percent lower versus the euro this year, the worst among 16 most-actively traded peers and its poorest annual performance since the debut of the European common currency in 1999. Against the dollar, the pound strengthened 0.5 percent to $1.4464. Currency Concern The British economy is in its first recession in 17 years. The government nationalized Northern Rock Plc and Bradford & Bingley Plc and is buying stakes in HBOS Plc, Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc to bolster the lenders. “Sterling is out of favor,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. “It’s declining on the basis of interest-rate differentials. Everyone expects rates to head toward zero.” Bank of England policy makers voted unanimously this month to cut the benchmark rate to 2 percent and refrained from a bigger reduction on concern it may prompt an “excessive” drop in the pound, according to the minutes of the Dec. 4 decision. The U.K.’s benchmark rate may be reduced to 0.5 percent, “with zero rates being very possible,” Howard Archer, chief European economist at IHS Global Insight, wrote in a note today. “It is also very possible that the Bank of England will engage in some forms of quantitative easing in 2009.” So-called quantitative easing can weaken a currency by increasing its supply in the financial system. It may take the form of purchasing bad debt from companies and accepting a greater variety of collateral, Bank of New York Mellon’s Mellor said. Parity ‘Inevitable’ Short sterling futures contracts maturing in March fell by 61 basis points since the Bank of England decision, indicating investors are betting on a deeper cut in rates. Parity between the euro and the pound is “inevitable,” Mellor said. “Short-sterling markets are factoring in around a 50-basis-point move before March, so a continued ratcheting down of rate expectations should undermine sterling further.” U.K. mortgage approvals and manufacturing data due Jan. 2 “may be the catalyst for parity,” said Ashraf Laidi, chief foreign exchange strategist at CMC Markets in London. “Euro-pound is less than 2 pence away from parity and thin liquidity makes it relatively easy to breach above that.” The pound dropped to the lowest level against a currency index comprised of its main trading partners, according to a Bank of England gauge, which was created in 1990. The reading was 73.4, from 73.7 yesterday. The British currency may be poised to rebound against the euro, according to its relative strength index. The measure fell to 19, from 21 yesterday. The last time it was less than 20, on Dec. 18, the pound jumped 1.9 percent against the euro the next day, snapping a three-day decline. U.K. government bonds rose, pushing the yield on the two-year gilt down five basis points to 1.13 percent. The 4.75 percent security due June 2010 gained 0.06, or 60 pence per 1,000-pound ($1,450) face amount, to 105.13. The 10-year gilt yield was little changed at 3.11 percent. Bond yields move inversely to prices.

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