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.