The pound slid and gilts surged after Bank of England Governor Mervyn King said measures being taken to revive lending may not work amid a “deep recession.” The British currency tumbled versus the dollar, euro and yen after a report showed unemployment rose in January to the highest level in a decade. U.K. policy makers will probably cut interest rates and boost the money supply, King said today at a press conference following the publication of the central bank’s quarterly inflation report. Two-year gilt yields dropped the most in more than two months as investors sought the safest assets. “People in the market are getting out of the pound,” said Geoffrey Yu, a currency strategist in London at UBS AG, the world’s second-biggest foreign-exchange trader. “King said the U.K. is in deep recession. But the lack of confidence that things will work is the most important and unsettling part of his speech today.” The pound dropped 1.2 percent to $1.4362 as of 12:25 p.m. in London. Against the euro, the British currency sank 1.5 percent to 90.13 pence. It declined 1.8 percent to 129.23 yen. The pound’s trade-weighted index, a gauge of its performance against currencies including the yen, Swiss franc, euro and dollar, fell to 73.95, from 75.26 yesterday, leaving it 3.9 percent higher this year. ‘Further Easing’ The Bank of England cut its forecasts for gross domestic product and inflation and said the risks to U.K. economic growth are “heavily to the downside” as governments struggle to save the financial system from collapse. The British economy will contract at an annual 4 percent rate by the end of the first quarter and inflation will slow to 0.5 percent at the end of next year, the central bank’s forecasts released today in London show. King said the central bank is ready to take action to boost money supply, which he said isn’t rising quickly enough. “That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending,” King said. “Further easing in monetary policy may well be required.” The number of people receiving jobless benefits rose 73,800 to 1.23 million, the most since July 1999, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 24 economists was 89,000. Last month’s figure was revised to 79,900 from 77,900. “It will be difficult for the pound the push ahead in this kind of economic environment,” said Audrey Childe-Freeman, senior currency strategist in London at Brown Brothers Harriman Ltd. “The disappointment over the U.S. financial stability plan also seems to have rekindled risk aversion and that’s bad news for sterling.” Economic Crisis The Bank of England’s Monetary Policy Committee, which cut its benchmark rate to 1 percent this month, is scheduled to next meet on March 5. King said policy makers can start using new tools before the rate falls to zero because “we’re getting to the point where the efficiency of further cuts is diminished.” The Bank of England’s key rate will reach 0.5 percent by the end of the second quarter, according to a median forecast of 34 economists in a Bloomberg News survey. The two-year gilt yield plunged by as much as 29 basis points, the biggest one-day decline since Dec. 2. It was recently 25 basis points lower at 1.38 percent. The yield on the 10-year note fell 19 basis points to 3.66 percent. The three-year breakeven rate, a gauge of market inflation expectations derived from the yield difference between three-year regular and index-linked bonds, was eight basis points. It was 44 basis points at the start of the month. The central bank lowered its benchmark interest rate by 400 basis points since October.

Source