Pound plummets to new low over rate-cut fears

DIANE COYLE

Economics Correspondent

The pound touched its all-time low against other important currencies yesterday, as foreign exchange dealers convinced themselves that the Chancellor, Kenneth Clarke, was poised to cut interest rates in the wake of the Budget. Gilts and shares celebrated.

The pound's trade weighted index dropped to 82.2 - the worst on record - against a range of other currencies before recovering to 82.4. It lost more than a pfennig against the German mark and more than a cent against the dollar. But the FT-SE 100-share index ended nearly 7 points higher at 3655.5.

Mr Clarke said yesterday: "I decide interest rates and I have not told anybody that they are coming down." He added that he had been known to surprise the financial markets in the past.

Even so, the short sterling futures market, which bets on future base rate levels, is counting on lower rates before the end of the year and a full half-point reduction from the current level of 6.75 per cent before the end of March.

Some analysts were more cautious, however. Adam Cole, UK economist at the broker James Capel, thought there would be a cut. "It is a question of when rather than whether - but I think we will have to wait until the new year," he said.

Simon Briscoe of Nikko Securities said: "The City has been left in the lurch. The prospects for interest rates are far more uncertain after the Budget than before."

He added that yesterday's announcement of lower mortgage rates by key lenders would reduce any need for the Chancellor to act when he and the Governor of the Bank of England meet to discuss monetary policy on 13 December.

The main reason to doubt an early move, however, is the Treasury's optimistic forecast for the economy next year. It surprised independent economists with a prediction that GDP will grow by 3 per cent thanks to buoyant consumer spending and exports.

David Miles, at the investment bank Merrill Lynch, said it would be difficult for Mr Clarke to persuade Mr George there was a strong case for lower interest rates at a time when he was so cheerful about economic prospects.

Mr Clarke vigorously defended his Budget yesterday. He said the slowdown was only a pause and the recovery would be sustained. "We are not going back to boom and bust." He said the forecast of a return to buoyant growth next year did not assume base rate cuts.

Analysts said the higher government borrowing announced in the Budget also dampened the chance of a drop in base rates. Although some suspected the figures were deliberately pessimistic so that borrowing would turn out lower than expected next year, Mr Clarke insisted yesterday his new forecasts were honest: "Some past Chancellors have put in figures that they dreamt up rather than the ones they worked out."

The Bank of England said further gilt sales required between now and the end of the financial year would amount to pounds 14.9bn, or just over pounds 3.7bn a month.

The Bank of England announced the new schedule for funding the borrowing requirement, in line with the higher figures in the Budget. There will be a pounds 3bn gilt auction next Wednesday, and an extra auction in February.

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