The pound rose for a third day against the euro after the rate of inflation fell last month by less than economists forecast, prompting speculation the Bank of England may slow the pace of interest-rate cuts. The U.K. currency also rebounded from a two-week low versus the dollar as a government report showed price growth slowed to 3 percent, higher than the 2.7 percent median forecast of economists surveyed by Bloomberg. The pound declined earlier as slumping stock markets around the world prompted investors to buy the safest assets. “The report means rate cuts may not come as quickly as the market expected and that has given some support to the pound,” said Lutz Karpowitz, a Frankfurt-based currency strategist at Commerzbank AG, Germany’s second-biggest bank. “There will be more cuts, but they may come slower.” The pound rose as much as 1.3 percent to 88.36 pence per euro and was at 88.62 pence as of 11:55 a.m. in London. The U.K. currency dropped 0.3 percent to $1.4254, after earlier losing as much as 1.2 percent to $1.4125, the lowest level since Feb. 2. It bought 130.85 yen, from 131.15 yesterday. The pound may decline to $1.30 and 96 pence per euro by the end of March as the recession deepens, Karpowitz said. The MSCI World Index of stocks fell 1.3 percent, while the U.K.’s FTSE 100 Index lost 2.1 percent. ‘Typical Reaction’ “It’s a typical reaction to the deterioration in equity markets,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. Policy makers reduced the bank rate to 1 percent on Feb. 5, the lowest level since the Bank of England was founded in 1694. It will cut it another 50 basis points on March 5, according to the median forecast of 26 economists surveyed by Bloomberg. Investors reduced bets on a reduction in the U.K.’s key rate after the inflation report today, with the implied yield on the short-sterling June futures contract rising nine basis points to 1.57 percent, the highest level since Feb. 10. Bank of England Governor Mervyn King said Feb. 11 the effect on the economy of further rate cuts is likely to wane. “We’re getting to the point where the efficiency of further cuts is diminished,” he told reporters in London. Falling Demand U.K. government bonds climbed, with the 10-year gilt yield dropping one basis point to 3.48 percent. The 4.25 percent security due March 2019 rose 0.12, or 1.2 pounds per 1,000-pound ($1,427) face amount, to 108.60. Yields move inversely to bond prices. Investor demand weakened at a U.K. sale of 1 billion pounds of government bonds maturing in 2055. The sale of the 4.25 percent securities attracted bids 1.45 times the amount of securities offered, the U.K. Debt Management Office in London said today. The so-called bid-to-cover ratio was 1.86 times when the gilts were sold in November. The bonds were priced to yield an average 4.07 percent, down from 4.35 percent at the previous auction.

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