View from City Road: Reserves tell a tale of interest rate intentions

The best clue to the timing of the next interest-rate cut - and, yes, there will be one - was not in the Treasury's monthly monetary report but in the usually inconsequential figures for the foreign currency reserves.

Nothing is for certain in the world of the reserves, which are compiled on such a fluid basis that firm conclusions are drawn at one's peril. The sharp rise in the reserves in January may merely represent the unwinding of some long-forgotten government transaction that involved selling sterling forward. But it may also mean that the Chancellor was intervening to hold sterling down. That is still the most likely explanation.

Kenneth Clarke does not want to see Britain lose the competitive edge that we gained when sterling left the exchange rate mechanism. He is a Midlands man who likes manufacturing to prosper. As he said in Davos at the weekend, he would prefer the recovery to be fuelled by net exports rather than by consumers' spending, which was quite strong enough.

It would not be at all surprising if the Government had tried to slow the rise of the pound, now 6.8 per cent higher than its average level last February measured by the trade-weighted index, the low point since the exit from the ERM. With the devaluation since multicoloured Wednesday now a mere 9.8 per cent, it would be unwise to allow sterling to rise further.

If the first line of defence is intervention, the second is interest-rate cuts. A sharp rise in sterling, which is only too likely if interest rates stay unchanged when Germany's interest rates come down, could well spark a response. Not for the first time, Britain's monetary policy may prove to be dependent on the Bundesbank.