The pound slid against the euro and the dollar for a third day and gilts climbed on concern the British recession is deepening, depressing demand for riskier assets such as stocks. The currency also dropped against the yen as the benchmark FTSE 100 Index of stocks declined 1.3 percent. The spread between two- and 10-year government bonds reached the widest since at least 1992 after Bank of England Governor Mervyn King said yesterday the economy is in a “deep recession” that may prompt policy makers to keep cutting interest rates and pump money into the economy. “The downside risk for the pound has increased,” said Lee Hardman, a currency economist in London at Bank of Tokyo- Mitsubishi UFJ Ltd. “The Bank of England made it clear we’ve a serious economic problem, and they’re moving toward quantitative easing. Although their measures will eventually help the pound, the sentiment toward the currency should remain negative in the near term.” The pound tumbled 1.1 percent to $1.4232 as of 12:38 p.m. in London. Against the euro, the British currency weakened 0.7 percent to 90.28 pence. It declined 1.5 percent to 128.15 yen. Hardman predicted the pound will depreciate to $1.35 in the next three months. The pound’s trade-weighted index, a gauge of its performance against currencies of Britain’s trading partners including the yen, Swiss franc, euro and dollar, declined 3.4 percent this week to 73.67. Steepest Curve The yield on the two-year gilt slid 19 basis points to 1.15 percent, after losing 31 basis points yesterday, the biggest one- day drop since Oct. 6. The price of the 4.25 percent security due March 2011 climbed 0.39, or 3.9 pounds per 1,000-pound ($1,423) face amount, to 106.30. The yield on the 10-year note fell 12 basis points to 3.49 percent. The two-year gilt gain pushed the yield difference, or spread, to the 10-year note to 237 basis points, the widest since Bloomberg started compiling the data in January 1992. The Bank of England yesterday cut its forecasts for U.K. gross domestic product and inflation and said the risks to economic growth are “heavily to the downside.” Loans for house purchases fell last year to the lowest level since 1974, declining an annual 49 percent to 516,000, the Council of Mortgage Lenders said today. The pound may fall further in the near-term after King said yesterday interest-rate cuts and a weaker currency will give a boost to the economy. ‘Weak Pound’ “The Bank of England welcomes a weak pound to an extent,” said Neil Jones, head of hedge fund sales in London at Mizuho Corporate Bank. “That’s a reverse intervention. We expect sterling to underperform other major currencies.” The London interbank offered rate, or Libor, that banks say they charge each other for overnight loans in pounds fell to less than 1 percent for the first time amid speculation policy makers will cut rates to near zero. The rate slipped more than half a basis point to 99 basis points today, the British Bankers’ Association said. Policy makers’ key rate will reach 0.5 percent by the end of the first quarter, from 1 percent currently, according to the median forecast of 35 economists in a Bloomberg survey. There are signs that a weaker pound may start to benefit the economy. A government report on Feb. 10 showed the nation’s trade deficit shrank in December to the smallest in 18 months as the currency’s decline spurred exports. Bond Returns Investors should sell the euro against the pound if the European currency strengthens to 92 pence, Barclays Plc said. There may be “downside for the pound in the near term,” a team of Barclays Capital strategists led by David Woo wrote in a report today. “It does not change our view that too much bad news is priced into the U.K. relative to the euro zone.” The Treasury sold 1.1 billion pounds of inflation-protected debt today. The average yield was 1.310 percent and investors bid for 1.57 times the securities offered, the highest so-called bid- to-cover ratio for that security since May 2007. Gilts handed investors a 2.5 percent loss this year, compared with a decline of 0.2 percent for German debt and a 2.40 percent loss from U.S. Treasuries, according to Merrill Lynch & Co.’s U.K. Gilts, Federal German Governments and U.S. Treasury Master indexes.

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