Pound plunges to new low

BY DIANE COYLE

Economics Correspondent

The pound plummeted to a new low against the German mark and a basket of other currencies yesterday. It will be at risk for the rest of the week, with the Bank of England due to publish a warning of higher inflation after the Chancellor's decision last Friday not to raise base rates this month.

After a quiet start to the day, sterling began to fall sharply in heavy afternoon trading. There were rumours of Bank of England intervention to manage the slide.

The pound dropped more than two pfennigs against the mark, to close just below DM2.18. Its value against a basket of currencies dived 1 per cent to a new low of 82.7, after falling by the same amount on Friday.

The currency market was reacting to the Chancellor of the Exchequer's unexpected inaction on base rates on Friday, the day after the Government's local election disaster. A half-point rise from the current 6.75 per cent had been fully anticipated. Many investors saw the failure to act as motivated by politics rather than economics.

Ian Shepherdson, an analyst at HSBC Markets, said: "It looks like the Chancellor has concluded that there are not many votes in pleasing the markets." Steven Barrow, currency economist at Chemical Bank, said: "There has to be an increased danger that the Government will take more risks with the economy before the general election."

Although many City analysts agreed there were arguments for and against another interest rate increase, there is disappointment in the financial markets that the Chancellor, Kenneth Clarke, and the Governor of the Bank of England, Eddie George, did not live up to their previous hardline record.

Paul Mortimer-Lee, chief economist at Paribas Capital Markets, said: "It was the first real test of the Government's anti-inflation strategy, now that inflation has started to go up. They funked the tough decision."

The figure for April retail prices, due out tomorrow, is likely to show a better inflation performance than the previous month. The target measure, the retail price index excluding mortgage interest payments, rose to 2.8 per cent in March. It should fall back because last April's introduction of VAT on domestic fuel will finally stop affecting the 12-month comparison.

However, the Bank of England's quarterly inflation report, also published tomorrow, will show a gloomier forecast than it made in February. The Bank will have to reveal its concern about the effect of sterling's fall since February. The exchange rate is 6.5 per cent lower than it was when the last inflation report was prepared and has resulted in a sharp rise in import prices. The drop in the pound is equivalent to a 1.5 per cent reduction in base rates - reversing the increases since September - according to the Treasury's normal rule of thumb.

So far Mr George has dismissed the pound's weakness as a "wobble". However, City economists are becoming increasingly concerned. Helen Macfarlane of Hoare Govett said: "This is not a repeat of 1992 when sterling fell out of the exchange rate mechanism. The economy is not weak enough now for the pound's fall to have no effect on inflation."

Robin Marshall, chief economist at Chase Manhattan, said: "Sterling's decline has now reached levels where it will bring the counter-inflation strategy into question if the Chancellor does not respond." However, Mr Clarke ruled out an interest rate increase this month.

The market's expectation of an increase in June instead is already building up. The Chancellor and Governor next meet on 7 June. Minutes of their 5 April meeting will be published next Wednesday.

Comment, page 33

Arts and Entertainment
arts + entsWith one of the best comic roles around, it's no wonder she rarely bothers with films
News
people
News
i100
News
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
PROMOTED VIDEO
Voices
A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
Sport
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
News
i100
Sport
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
sport
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Life and Style
A small bag of the drug Ecstasy
Health
News
i100
Life and Style
Floral-print swim shorts, £26, by Topman, topman.com; sunglasses, £215, by Paul Smith, mpaulsmith.co.uk
FashionBag yourself the perfect pair
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Financial Analyst - Forecasting - Yorkshire

£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

Business Architect - Bristol - £500 per day

£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

Hunters protect Russia's rare Amur tiger

In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
Transfers: How has your club fared in summer sales?

How has your club fared in summer sales?

Who have bagged the bargain buys and who have landed the giant turkeys
Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

'I'm a realist; I know how hard this business is'

Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

The best swim shorts for men

Bag yourself the perfect pair and make a splash this summer
Has Ukip’s Glastonbury branch really been possessed by the devil?

Has Ukip’s Glastonbury branch really been possessed by the devil?

Meet the couple blamed for bringing Lucifer into local politics
Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup