Pound's slump heralds rate rise

Interest rates look set to rise by a further half point early next month after the pound touched an all-time low against the mark yesterday and new details emerged showing that the Chancellor and Governor of the Bank of England are worried about sterling's weakness.

On the foreign exchange markets the pound's index against a basket of other currencies hit a record low of 83.6 before recovering to close at 83.8. The previous low was 84, reached after sterling tumbled out of the European exchange rate mechanism in September 1992.

In early March the index stood at 86. It has now fallen by more than 5 per cent this year. Sterling also hit a new low of DM2.1790 yesterday compared with DM2.2070 on Tuesday.

Other European currencies also weakened sharply against the mark yesterday, dragged down by the French franc. It has come under pressure in the week ahead of the first round of the French presidential vote, thanks to fears that the front-runner, Jacques Chirac, would break the franc's strong link to the German currency if elected. The franc fell to 3.5517 against the mark, down from 3.4855.

The dollar came under direct fire too. It started the European trading day below 80 yen, prompting the Bank of Japan to intervene heavily in the market. It later revived to trade around Y81 and DM1.3570.

Concerns over the pound's fall against the European currencies emerged with the details of the meeting on 8 March between Kenneth Clarke, the Chancellor, and Eddie George, Bank of England Governor,published yesterday. It revealed their concern about sterling's weakness, even though they decided that an increase in interest rates then would be premature.

The Governor said the strains in the currency markets could last for some time. If the effect on the pound persisted, it would need to be taken into account in setting monetary policy. The Chancellor agreed that "developments in exchange markets would have to be kept under review".

Steve Barrow, currency analyst at Chemical Bank, said: "The pound is not at the centre of attention in currency markets. Its weakness was a by-product of the mark's strength against all comers - particularly the French." But Gerard Lyons, chief economist at the securities firm DKB International, said: "The minutes suggest we should not be surprised by an interest rate rise in response to the pound's problems, even though there is no domestic reason to be concerned about inflation."

The financial markets generally leapt to the same conclusion. Short sterling, the futures index used to bet on short-term interest rate moves, fell sharply, pointing to base rates above 7.5 per cent before September.

Adam Cole at James Capel said: "To miss an opportunity to raise interest rates against this background would take huge risks with the credibility of monetary policy." The next monetary policy meeting will be held on 5 May, the day after the local government elections and the week before the Bank's quarterly inflation report is due out.

Better-than-expected US trade figures did not help the dollar, with the markets focusing more on the lack of progress in US-Japan trade talks. The deficit in trade and services bounced from a record $12bn shortfall in January to $9bn in February. The closely watched bilateral deficit with Japan narrowed slightly to $4.71bn.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Night job: Pacha nightclub DJ, Joan Ribas, is the new kingmaker on the island
news
Arts and Entertainment
Nicole Kidman plays Grace Kelly in the film, which was criticised by Monaco’s royal family
film'I survived it, but I’ll never be the same,' says Arash Amel
Life and Style
Retailers should make good any consumer goods problems that occur within two years
tech(and what to do if you receive it)
Life and Style
healthIf one was missed, vomiting blood was seen as a viable alternative
Life and Style
tech
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

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Guru Careers: Graduate Editor / Editorial Assistant

£16 - 20k: Guru Careers: A Graduate Editor / Editorial Assistant is needed to ...

Day In a Page

Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

The ZX Spectrum is back

The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

Even the screenwriter pours scorn on Grace of Monaco biopic

The critics had a field day after last year's premiere, but the savaging goes on
Menstrual Hygiene Day: The strange ideas people used to believe about periods

Menstrual Hygiene Day: The strange ideas people once had about periods

If one was missed, vomiting blood was seen as a viable alternative
The best work perks: From free travel cards to making dreams come true (really)

The quirks of work perks

From free travel cards to making dreams come true (really)
Is bridge the latest twee pastime to get hip?

Is bridge becoming hip?

The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
Long author-lists on research papers are threatening the academic work system

The rise of 'hyperauthorship'

Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

The rise of Lego Clubs

How toys are helping children struggling with social interaction to build better relationships
5 best running glasses

On your marks: 5 best running glasses

Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

'Ben Stokes gives everything – he’s rubbing off on us all'

Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada