By Lukanyo Mnyanda March 23 (Bloomberg) -- The pound fell against the dollar as a report showed U.K. inflation slowed more than economists estimated last month, buoying the case for the central bank to keep interest rates at a record low to safeguard the recovery. Britain’s currency also dropped for the third day in four against the yen and slid versus the euro. The annual inflation rate declined to 3 percent, from 3.5 percent in January, the Office for National Statistics said today. Chancellor of the Exchequer Alistair Darling will present his budget tomorrow as he seeks to tackle a deficit set to reach 12.6 percent of gross domestic product. “We were expecting a higher number and sterling took a hit initially,” said Chiara Cremonesi, a fixed-income and currency strategist at Unicredit SpA in London. “There’s a lot of uncertainty surrounding the U.K. and if the budget doesn’t deliver concrete steps to cut the deficit, it would be negative for the pound.” The pound declined 0.7 percent to $1.4989 as of 11:08 a.m. in London. It was 0.3 percent weaker at 90.08 pence per euro. The U.K. currency slid 0.5 percent to 135.28 yen. Concern the government will struggle to narrow a budget gap that’s approaching that of Greece combined with an economy that lagged behind the euro region and U.S. in exiting the recession have helped send the pound lower this year against all 16-most traded currencies tracked by Bloomberg. Sterling lost 7.3 percent against the dollar and 1.6 percent against the euro in 2010. Retail Sales Economists predicted a decline in the inflation rate to 3.1 percent, according to a Bloomberg survey. Bank of England Governor Mervyn King said in a letter to Darling last month that the “temporary” jump in the inflation rate will ebb. The bank has a 2 percent target for inflation and the key interest rate is at 0.5 percent. The pound will extend losses if retail sales data, set for release on March 25, fall short of what economists are predicting, BNP Paribas SA said. Sales rose 0.6 percent in February, according to the median estimate of 14 analysts surveyed by Bloomberg, after declining 1.2 percent the month before. “All the hopes are on a good number following the winter weather-related poor reading,” a team led by London-based Hans- Guenter Redeker, global head of foreign-exchange strategy at BNP Paribas, wrote yesterday in a report. “If this rebound does not develop sterling will be hit hard.” Government bonds rose with two-year gilts, the most sensitive to the outlook for rates, leading gains. The yield on the notes fell 3 basis points to 1.19 percent. The 10-year gilt yield dropped 1 basis point to 3.91 percent. --Editors: David Clarke, Keith Campbell. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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