The pound rose the most against the euro since the debut of the common currency a decade ago on bets the European Central Bank 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 3.4 percent to 92.51 pence per euro, strengthening to less than 93 pence for the first time since Dec. 22. The British currency traded at 92.80 pence as of 5:53 p.m. in London, from 95.69 on Jan. 2. The U.K. currency gained 0.5 percent to $1.4615, rebounding from a drop of as much as 0.8 percent. The euro-area economy is likely to “remain weak” this year and may even contract in the first half, Papademos said yesterday in a speech in San Francisco. While inflation could “drop considerably” around the middle of the year, the risk of deflation is “nil,” he said. Job Creation Bank of England Governor Mervyn King may follow the Federal Reserve and pursue other ways of pumping money into the British economy, such as expanding the 200 billion-pound ($293 billion) program that allows banks to swap illiquid securities for government debt, economists said. U.K. Prime Minister Gordon Brown promised yesterday to create as many as 100,000 jobs and renewed efforts to spur bank lending. The pound slid 23 percent 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. Policy makers will probably cut the benchmark interest rate to 1.5 percent from 2 percent on Jan. 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 1.50 percent by the end of the second quarter, from 2.50 percent today. ‘Significant Decline’ “Euro-sterling could see a significant decline,” said Redeker, who predicts the pound strengthening to 90 pence per euro by the end of March and to 84 pence by year-end. The euro is poised to decline by 10 percent versus a basket of currencies including the pound, the Norwegian krone and the Swedish krona, Goldman Sachs Group Inc. said. “Forced euro buying is likely to abate as tension in credit markets becomes less severe,” currency strategists led by Jens Nordvig, New York-based senior global market economist at Goldman Sachs, wrote in a note today. “Investor flows in part driven by attractive valuations are likely to pick up as we enter a new year and as risk taking picks up somewhat from very depressed levels” in the fourth quarter of 2008, according to the report. U.K. construction, which accounts for 6 percent of the economy, contracted last month at the fastest pace in more than a decade, according to an index based on a survey of purchasing managers at building companies by London-based Chartered Institute of Purchasing and Supply and Markit. Government bonds fell, pushing the yield on the 10-year gilt up 12 basis points, or 0.12 percentage point, to 3.15 percent. The 5 percent security due in March 2018 declined 1, or 10 pounds per 1,000-pound ($1,464) face amount, to 114.62. The two-year gilt yield rose five basis points to 1.83 percent.

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