Pound falls to 12-month nadir

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The Independent Online

By Stephen Foley in New York

Sterling slipped to new one-year lows yesterday as the banking crisis frightened international investors and encouraged talk of a sooner-than-expected rate cut by the Bank of England.

The pound was back below $2 against the US currency and at its weakest level against the euro for 17 months after the publication of the minutes of the Bank's Monetary Policy Committee meeting earlier this month, which showed members taking a much more doveish tone than previously.

On a trade-weighted basis, which tracks sterling's performance against a basket of major currencies, the pound fell to a one-year low, its third straight day setting that record.

Expectations of a rate cut have been stoked by the turmoil in the financial markets and the near-run on Northern Rock which occurred days after the MPC voted unanimously to keep rates on hold at 5.75 per cent.

The minutes said the impact of financial-market disruption would depend on how long-lasting and how widespread it became, but that the Bank's prognosis at that point was that it was likely to be temporary and that a sustained re-pricing of credit risk was not unwelcome.

There was no talk of a rate rise to cool inflation. The MPC thought consumption had been a little weaker than expected in the second quarter and the housing market was slowing gently. Meanwhile, inflation was expected to remain around the 2 per cent target and the recent decline should help to contain price expectations.

"The committee is in a wait-and-see mode now rather than necessarily being predisposed to additional tightening," said Jeremy Stretch, a strategist at Rabobank. "If there is further economic fragility ahead, that may well be reflected in markets continuing to price in a loosening bias from the Bank and that will have an influence on sterling's performance."

Currency traders said that the decline of sterling reflected a bet that the Bank of England will cut rates sooner than many economists are currently forecasting.

A Reuters poll of 52 economists yesterday showed 40 believed rates would remain on hold for the rest of the year. Ten said rates would fall to 5.5 percent, most likely in November. In a poll taken two weeks ago, only one economist forecast a cut this year.