The pound fell and U.K. gilts rose after the Bank of England said the economy faces a “slow” recovery and inflation probably won’t meet its target by 2012, stoking speculation it will expand its asset-buying program. The British currency traded near the lowest in more than two weeks versus the euro and retreated from near a four-month high against the dollar after the central bank said inflation may decelerate to 0.4 percent this year amid the country’s worst recession since the 1980s. U K. policy makers kept the benchmark interest rate at a record low of 0.5 percent last week and added 50 billion pounds ($76 billion) to their bond-buying program. “The report gives the impression that the Bank of England feels they may need to step up quantitative easing beyond what has already been announced, which would be negative for sterling,” said Paul Robson, a London-based currency strategist at Royal Bank of Scotland Group Plc. “The outlook for sterling remains challenging.” The pound declined 0.8 percent to 90.01 pence per euro by 11:03 a.m. in London, after weakening to 90.20 pence. It reached 90.37 pence on May 11, the lowest level since April 27. It was at $1.5155 from $1.5271 yesterday, when it climbed to $1.5352, the highest level since Jan. 8. The U.K. economy “requires a period of healing,” Bank of England Governor Mervyn King said at a press conference in London today after the bank released its quarterly inflation report. “The economy will eventually heal but the process may be slow.” Gross domestic product will contract on an annual basis for the rest of this year before growth resumes in 2010, the central bank said its report. The yield on the 10-year gilt dropped eight basis points to 3.58 percent. The 4.5 percent security due March 2019 gained 0.64, or 6.4 pounds per 1,000-pound face amount, to 107.53. The two-year yield fell nine basis points to 1.07 percent. Bond yields move inversely to prices.

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