David Prosser: The fightback of sterling may be shortlived

Outlook: Government ministers sensed that there has been something of a run on confidence in the shadow Chancellor himself of late
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The Independent Online

George Osborne may have spent much of Sunday furiously insisting he was perfectly within his rights to tell the world he thought the Government's economic policies might trigger a run on the pound, but he will still have breathed a sigh of relief when sterling staged a modest recovery yesterday.

Government ministers' criticism of Mr Osborne was all about political opportunism, sensing, as they do, that there has been something of a run on confidence in the shadow Chancellor himself of late. Whether there really is any unspoken agreement that politicians do not muse on currency depreciations seems to be a moot point, but, in any case, Mr Osborne was merely voicing concerns being heard loudly elsewhere.

It is a fact that sterling has now corrected more sharply than it ever did under previous Labour administrations, and that the decline has been more marked than the depreciation in the aftermath of Black Wednesday, the day the pound fell out of the European exchange rate mechanism.

Moreover, yesterday's reprieve for Mr Osborne may prove temporary in the case of sterling, which is likely to fall further.

The risk of a currency crisis if the UK's international creditors lose faith in our ability to manage the economy sustainably is one reason why Mervyn King, the Governor of the Bank of England, has given only a lukewarm backing to the Chancellor's plans to spend (or tax-cut) the UK out of recession. He insists that any such measures must be accompanied by proposals for bringing borrowing back down once the crisis has passed. If not, Mr King reserves the right to ask the Bank's Monetary Policy Committee to raise interest rates in the medium term. A further depreciation of sterling, which would raise the cost of imports and raw materials, thus increasing inflation, may necessitate this in any case.

Mr Osborne is guilty of political naivety – he might have guessed how his comments would be seized upon, but he is quite right to warn the country about such fears.