Comments by Eddie George, the Governor of the Bank of England, combined with evidence from the British Chambers of Commerce of a marked services sector slowdown, prompted speculation about further reductions in UK rates. Giving evidence to MPs on the Treasury Select Committee, Mr George welcomed recent falls in sterling. He said: "It is not enough for the sectors that are suffering, but it is a move in the right direction."
Previously, Mr George, along with other members of the interest rate- setting Monetary Policy Committee, had expressed concern that interest rate cuts would prompt a sharp fall in the pound, which could generate inflationary pressures.
Nick Stamenkovic, economist at Bank Austria Credit Anstalt Futures, said: "The comments suggested the MPC is happy to see a weaker pound, and there are now few obstacles to further rate cuts."
Numerous City economists believe the MPC will cut rates by a further 0.25 percentage points next month. Rate cut speculation knocked the pound from DM2.803 on Wednesday evening to DM2.767 by close of trade yesterday.
Mr George told MPs that, despite media speculation to the contrary, recent comments about the UK economy made by Gordon Brown, the Chancellor, had not influenced the MPC. The governor said the Chancellor had been "absolutely scrupulous" in his dealings with the Bank, adding: "He [Mr Brown] has had lots of opportunities to have a nudge, nudge, wink, wink, word in your ear. But he has not done that at all."
Mr George admitted that he had made a point of telling MPC members to take no account of media speculation.
The governor surprised the City by partially endorsing capital controls. He said there was a case for short-term capital controls "in exceptional circumstances" to buy struggling economies some time.
Separately, the BCC said its latest quarterly survey - which covers almost 10,000 UK firms - revealed "rapid deterioration" in the services sector, an area of the economy that has, to date, been relatively unaffected by slowing domestic and international growth.
Domestic sales figures for the service sector are now at their lowest level since 1993.