Bank of England moves to calm fears as sterling strikes fresh high

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The Bank of England intensified its charm offensive among industry yesterday as its deputy governor returned to his childhood roots in the Black Country to tell business sterling should start to fall soon.

Mervyn King told business leaders in Wolverhampton the pound was "more likely than not" to fall against the euro. His speech came just hours after Eddie George, the Governor, said he was "sensitive" to the problems of manufacturers. But their words had little impact on the pound, which surged to new all-time highs against the euro.

Mr King said he had returned to Wolverhampton, where he attended the city's grammar school, to tell business the Bank was sympathetic to their plight. "Manufacturers face real problems, most recently from the high level of sterling against the euro, and they may in part blame the Monetary Policy Committee," he said.

"I can certainly share the frustration of those who, having first created and then built up a successful business, find that its future founders on events totally outside their control."

He said sterling was "more likely than not to fall over the next two years or so". "The timing and magnitude of any such fall are unknowable," he added.

But he insisted that any attempt any attempt to bring down sterling by cutting rates would drive up inflation. "High inflation in the past did not raise manufacturing profitability, and led to a cycle of boom and bust which made life for manufacturers only more difficult," he said.

His message pleased the Black Country Consortium, a private-public partnership that hosted Mr King's visit. Sarah Middleton, its regeneration officer, said: "Clearly there are still concerns about high sterling but businesses were genuinely reassured that the Bank was aware of the pressures they are facing."

Keith Hirst, its chairman and head of a metal components manufacturer, said businesses blamed the Government for raising the burden of regulation. "The Government must create conditions for enterprise to thrive. A bit of dressing on the edge in the form of stock options for dot.coms will not do much for the 25,000 small businesses in this area."

On the financial markets, the euro reached a record low of 59.68p in New York on expectations the ECB will hold rates at 3.5 per cent.

Nick Stamenkovic, an analyst at IDEAglobal.com, said the euro was heading for further falls, as there was little sign that the US economy was slowing enough to cause the dollar to fall. "It is just a matter of time before we test the all-time lows again," he said.

Jose Luis Alzola, an economist at Salomon Smith Barney, said the euro's depreciation was "worrying" for the European Central Bank, whose last forecast was based on a rise in the euro to $1.05. Yesterday it hit $0.954.

"The implication is that the stimulus on demand from the depreciation completely wiped out the tightening by the ECB since November," he said, referring to the hike in rates from 2.5 to 3.5 per cent. He said rates would hit 4.5 per cent by the year-end.

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