The pound fell by a full point against a basket of currencies to end the day at 79.9 per cent of its 1985 value. This was the pound's biggest one-day fall in more than 10 weeks and its lowest close for over a month.
Speculation that base rates might be cut saw the pound open sharply lower, as dealers recalled the politically-inspired cuts following January's surge in unemployment and the climb-down on pit closures in October.
'The markets do not like political uncertainty,' said David Cocker of Chemical Bank. Calls for the sacking of Norman Lamont, the Chancellor, fuelled the nervous mood inspired by the Government's drubbing in last week's local elections. David Walton, of Goldman Sachs, said government unpopularity was unlikely to trigger a rate cut, but would delay any rise.
A brief afternoon rally by the pound was swiftly reversed as the dollar rose on a report in Stern, a German magazine, that Theo Waigel, the German Finance Minister, would resign. Sterling fell 2.46 pfennigs to DM2.4627 and 4.23 cents to dollars 1.5325. The dollar rose 2.7pf to DM1.6070.
The money markets reflected the growing possibility of a cut with the three-month interbank rate - which tracks base rate expectations - falling 1 16 of a point to 57 8 per cent. This suggests the next move from the 6 per cent base rate will be down.
But economists saw little need yet for a rate cut to boost the economy, as unexpectedly buoyant March consumer credit figures continued the run of upbeat data.
Borrowing from finance houses, on bank credit cards and from building societies (excluding mortgages) rose by a net pounds 232m, the biggest rise since April 1991. The amount of debt outstanding rose pounds 156m to a 10-month high of pounds 29.9bn, as pounds 76m of bad debts were written off.
Bank credit card borrowing showed its biggest rise for 13 months, with net lending from finance houses recording its largest jump since late 1990. But Simon Briscoe, of Midland Global Markets, warned this might fall as the effect of the abolition of car tax on car sales tailed off. The amount of new credit advanced rose by over pounds 300m in March to a record pounds 4.7bn.
There was also unexpectedly good news on inflation, which some analysts said might help the Government to justify another rate cut. A rise of nearly 3 per cent in the pound and a fall of more than 5 per cent in commodity prices in April helped to push industry's raw material costs down by 1 per cent, adjusting for normal seasonal changes.
This reduced the annual rate of input price inflation from 8.4 to 7.2 per cent, the first fall since last June. Falls in fuel, metal and other imported raw material prices were offset by higher prices for home-produced raw materials for food manufacturers.
Factory gate inflation - the annual rise in the prices charged by manufacturers for their output - remains relatively subdued.
Output prices rose 0.4 per cent in April, adjusting for seasonal effects. This lifted the annual rate of increase from 3.7 to 3.8 per cent, its highest for a year.