Pound falls on remarks by MPC member

The pound fell sharply against the dollar yesterday after a leading member of the Bank of England's Monetary Policy Committee said she was unconcerned by a decline in the value of sterling and added that she did not believethe UK was moving back towards a high-inflation environment.

The remarks, by the economist Kate Barker, were interpreted as an official endorsement of the decline in sterling's value, with the pound down by more than 2 per cent to just under $2.02 last night. Ms Barker's remarks also suggest that she sees few obstacles to further interest rate cuts in the new year.

The currency was also hit by the failure of money-market interest rates to respond to the combined drive by central banks to relax the credit crunch.

The cost of borrowing sterling for three months fell just a single basis point to 6.49625 per cent yesterday, according to the British Bankers' Association. The rate remains almost a percentage point (100 basis points) higher than the Bank of England's base rate, cut last week to 5.5 per cent, indicating that an initiative announced on Wednesday by five central banks to pump $100bn (49bn) of liquidity into credit markets is having little impact so far.

Despite a strong start to the year, sterling has fallen recently against most major currencies, and is down around 5 per cent on a trade-weighted basis since August as markets have speculated on the likelihood of lower UK interest rates, as indicated by the Bank of England's inflation report published last month.

Adrian Schmidt, a foreign-exchange strategist at Royal Bank of Scotland, said: "Concerns about the high level of [money market] rates in the UK and eurozone, and the essential failure of the central banks' liquidity additions, account for some of the pound's decline."

Suspicions that the Bank of England is content to see sterling continue to drift lower were strengthened when Ms Barker, a former chief economist for the CBI, said weakness in the pound had benefited British manufacturers.

"Manufacturing companies at the moment are doing quite well sterling has weakened off a bit and that is good news for a lot of these companies," she said. "Companies which have survived the difficulties of the past few years are generally in pretty good shape with good products, and their optimism remains unchanged despite the difficulties we have been experiencing in the financial markets."

Ms Barker said she did not think the UK was moving back to a high-inflation environment. However, figures from the European Union, published yesterday, showed that price pressures were continuing.

Consumer price inflation in euro member states was revised up to 3.1 per cent, from an initial estimate of 3 per cent. Food and energy costs were the major factors in pushing price rises to their highest level since 2001.