The British pound gained against the dollar and euro on speculation the Bank of England will stop short of cutting the target lending rate to zero. The reduction of 50 basis points to a record low of 1 percent matched the median forecast of 61 economists in a Bloomberg survey. The pound also advanced against the yen. The Bank of England said the global economy is in the throes of severe downturn and that rate cuts will eventually have a “significant impact” on the U.K. economy. “The Bank of England is suggesting this is as much as they wanted to do for now,” said James McCormick, global head of currency and local market strategy at Citigroup Global Markets Ltd. “Policy makers have moved things a lot already. We are probably moving into, at least, a short period of rates on hold. The pound may be reaching the bottom.” The pound rose 0.9 percent to $1.4604 as of 1:05 p.m. in London. The British currency strengthened 1.2 percent to 87.78 pence per euro. Against the yen, the U.K. currency gained 1.5 percent to 130.90. McCormick said he “wouldn’t be surprised” if the pound rises to $1.50 or above by the end of this month. The European Central Bank said today it was keeping its main refinancing rate unchanged at 2 percent after four reductions since early October. The Bank of England cut the main rate by 50 basis points on Jan. 8. The pound rose 0.8 percent against the dollar that day and gained 0.3 percent versus the euro. The central bank cut its benchmark rate by 450 basis points since the end of 2007 to revive the economy as the global financial crisis plunged Britain in a recession. The U.K. economy will shrink until the fourth quarter as the world endures the slowest growth since World War II, the National Institute of Economic and Social Research said yesterday. ‘Marginal benefits’ Gilts fell on speculation policy makers may now slow down the pace of interest rate cuts. The Building Societies Association, which represents customer-owned lenders, this week called for the central bank to leave the benchmark interest rate unchanged as savers are hurt by low deposit rates. The 10-year yield rose three basis points to 3.74 percent. The two-year yield climbed two basis points to 1.65 percent. The price of the 4.25 percent security due March 2011 fell 0.04, or 40 pence per 1,000-pound ($1,461) face amount, to 105.29. “The most important focus from here is not so much the terminal timing and level of the bank rate, but what tools the MPC may adopt next, and how long rates will remain at ultra-low levels” said John Wraith, head of sterling rate and product development in London at Royal Bank of Canada. “We have a large amount of sympathy with the calls for the rate not to be reduced all the way to zero given the marginal benefits it confers and the damage it does to bank margins.” The yield difference between the two- and 10-year bonds was unchanged at 209 basis points.

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