Pound to be left to its fate

Treasury says protecting the currency is 'not a first-order issue' as Euro readies to overtake sterling in markets for the first time.

The plummeting pound will not be propped up by government intervention, ministers declared yesterday, as it emerged that they will simply hope Britain's beleaguered currency stabilises as broader measures to stimulate the economy begin to take effect.

Sterling has fallen to a series of record lows against the euro in recent days, and looks set to reach parity with the single European currency for the first time. Its fall has hit holidaymakers as well as the thousands of Britons living on the Continent, who have seen the value of pensions and savings plummet.

But ministers have made it clear no help will be forthcoming to stabilise sterling. The Europe minister, Caroline Flint, confirmed the value of the pound was not a "first-order issue" and Yvette Cooper, Chief Secretary to the Treasury, said bolstering the currency had never been the Government's aim.

Senior government figures are wary of mistakes made in the lead-up to Black Wednesday in 1992, when attempts by John Major's government to prop up the pound failed and led to a bill thought to be more than £3bn.

The growing possibility of deflation, now discussed as a possibility by the Treasury, is seen as a greater threat to the economy. Official figures published this week are expected to show that inflation dramatically slumped last month to under 4 per cent, compared with 4.5 per cent in October.

So ministers must cross their fingers as the Government's £20bn fiscal stimulus package, which includes a temporary 2 per cent cut in the rate of VAT, kicks in. "We have never had a policy of targeting the pound. Our policy has been to target inflation," Ms Cooper said yesterday. "Previous attempts to target exchange rates caused all kinds of problems." She said the fall in the pound had been caused by "uncertainty in the world economy" and that the Government was "plotting a course" to help Britain emerge from the economic crisis intact.

Ms Flint said international co-operation, together with reviving bank lending, were the best methods of breathing life into the economy, which would in turn restore faith in the pound. "The exchange rate obviously is affected by what's happening at the moment, but we have got to get those first-order issues right in order to have a better look at issues around the exchange rate," she said.

She said she was optimistic that the pound would begin to stabilise again "if we get those other factors right". Critics of the Government said the apparent flight from the pound had been caused by the Government's unaffordable spending package, coupled with rising national debt.

A 2.5 percentage point cut in interest rates in just two months by the Bank of England has also sent Britain's bank rate below that in the eurozone.

Serious concerns about the value of the pound developed over the weekend after it emerged that holidaymakers at airports and on Britain's high streets were already being offered an exchange rate very close to parity.

While the Treasury has faith that its fiscal package, announced by Chancellor Alistair Darling last month, will ease the recession and stabilise the pound, the Conservatives blamed the spending package for sterling's woes.

"The Government says it will not step in as the pound slides to parity with the euro, but it is this Government's reckless intervention which has caused the pound's weakness," said the shadow Chief Secretary to the Treasury, Philip Hammond. "Gordon Brown's huge borrowing programme has now been firmly rejected by the markets."

Others inside the party hinted that Labour would have to rethink its apparent abandonment of the pound once its effects began to be felt more generally. "However much Labour says a weak currency can be a good thing, we will all suffer from this in the long term," a senior Tory source said last night.

The man at the helm during Black Wednesday, Sir John Major, also said the Government was wrong to put its trust in a fiscal stimulus deal. "What the Government is doing now is ensuring that our recession is longer and deeper than everyone else's," he said.

John Varley, group chief executive of Barclays, also predicted the economic gloom would worsen. The UK was only halfway through the slump and house prices would fall a further 10 to 15 per cent before the end of next year, he said. On top of that, unemployment could hit 7.5 per cent within the next 12 months, he told Sky News.

Some in the City said they could already foresee a time when the pound, worth €1.40 just a year ago, would dip below €1. Analysts have also begun to discuss the possibility of Britain adopting the euro, or pegging the value of the pound, to prevent it falling any further.

"The euro is becoming the darling of the currency market and there's no confidence in the pound, said Martin Slaney, of GFT Global Markets. "I wouldn't be surprised if it hit parity with the euro and even fell below that."

The Government still believes that an EU-wide stimulus deal agreed last week will insulate it from accusations of recklessness.

*The Irish government announced a €10bn fund to recapitalise financial institutions last night. The money will be available to AIB, Anglo-Irish, Irish Nationwide, Irish Life & Permanent and Bank of Ireland, which owns the Bristol & West bank.

Q&A The pound in your pocket

Will this affect my holiday?

In the eurozone, yes. An ice cream that cost you £1 a year ago could now cost over 10p more. The rising costs can add up during a Christmas family holiday.

What can I do?

Some holidaymakers are changing their plans and picking cheaper, last-minute holiday packages. Others are heading out of the eurozone, to Turkey or Bulgaria, for example, where the pound will stretch further.

How about elsewhere?

The pound is not the only currency in trouble. The dollar is also struggling, due to high levels of debt in the US.

Who else suffers from this?

Apart from holidaymakers, British people living abroad who are paid their salaries or pensions in pounds. For them, the cost of living has increased markedly in just a matter of months, pensioner couples in some cases losing more than £100 a month even as the cost of living rises.

Does anyone benefit?

Any company making something to be sold in Europe, because the goods will now be comparatively cheaper than a year ago, giving them a competitive advantage over European rivals.

How could the pound be helped?

Most easily by the Bank of England putting up interest rates, but at a time of recession, that is the last thing the economy needs. There is one way Britain could benefit from the stability of the euro: by adopting the currency itself.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
techPatent specifies 'anthropomorphic device' to control media devices
Voices
The PM proposed 'commonsense restrictions' on migrant benefits
voicesAndrew Grice: Prime Minister can talk 'one nation Conservatism' but putting it into action will be tougher
News
Ireland will not find out whether gay couples have won the right to marry until Saturday afternoon
news
News
Kim Jong-un's brother Kim Jong-chol
news
News
Manchester city skyline as seen from Oldham above the streets of terraced houses in North West England on 7 April 2015.
news
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 General

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Guru Careers: Software Developer

£35 - 40k + Benefits: Guru Careers: We are seeking a Software Developer (JavaS...

SThree: Trainee Recruitment Consultant / Resourcer

£18000 - £23000 per annum + Commission: SThree: As a Trainee Recruitment Consu...

Ashdown Group: UI Developer - (UI, HTML, CSS, JavaScript, AngularJS)

£25000 - £40000 per annum: Ashdown Group: UI Developer - (UI, JavaScript, HTML...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?