Market joy as pound's plunge goes on

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STERLING tumbled to new record lows yesterday as market suspicions mounted that the Government was ready to tolerate a falling pound as the price for a further cut in bank base rates.

The latest collapse of sterling caused euphoria in the stock market, which bounced to a record high. Equity dealers anticipate bigger company profits as the impact of lower interest rates and the devaluation feed through.

The FT-SE 100 index of leading shares surged by 39.4 points to close at 2873.8.

The renewed pressure on sterling coincided with a fresh outbreak of turbulence in the European exchange rate mechanism. Speculation was rife that a devaluation of the Danish krone - which was yesterday pinned to its ERM floor despite a 1.5 percentage point rise in interest rates to 13 per cent - was imminent.

Traders feared this would open up the prospect of renewed attack on the French franc and the possible demise of the entire system.

Sterling dropped more than a pfennig to a record closing low of DM2.3583 and lost one cent to dollars 1.4345, its lowest finish against the US currency since 1986.

Against a trade-weighted basket of currencies, the pound lost 0.2 of a percentage point to end at 76.9 per cent of its 1985 value, a record low. Sterling has now fallen by 15.4 per cent since it left the ERM in September.

One potential respite for both the pound and the ERM was the hope that the Bundesbank might today signal a small but symbolically important easing in German monetary policy.

The Treasury, meanwhile, said that the falling pound had had little discernible impact on inflation. 'Inflation pressures generally remain weak,' said its latest report on monetary conditions.

Officials said the Government would continue to monitor the exchange rate and give it full weight in determining monetary policy. Although that was a restatement of existing policy, it was intended as a signal that there could be intervention to stop a further slide in the value of the pound.

One Whitehall source said of the pound's fall: 'Things are not that bad.' However, it is understood Norman Lamont may take the opportunity of Treasury questions in the Commons today to dampen hopes of more rate cuts.

Downing Street ruled out any detailed restatement of Government economic policy until the Budget on 16 March. In spite of growing pressure, the Prime Minister's office said the Chancellor was unable to break his pre-Budget 'purdah' while Mr Major is also anxious to avoid undermining the Chancellor by setting out economic policy.

Figures showed yesterday that the growth of narrow money supply - mainly cash - broke through its 1-4 per cent target range for the first time since 1990 to rise by 4.1 per cent in the year to January. But the Treasury played down the importance of this indicator, which only late last year was used to justify a cautious approach to lower rates.

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