The pound tumbled to fresh record lows against a basket of other currencies yesterday as two members of the Bank of England�s Monetary Policy Committee warned deep cuts in UK interest rates would not be enough to solve the economy�s woes.
The pound tumbled to fresh record lows against a basket of other currencies yesterday as two members of the Bank of England's Monetary Policy Committee warned deep cuts in UK interest rates would not be enough to solve the economy's woes.
The remarks yesterday from Sir John Gieve, Bank of England deputy governor, and Tim Besley, an external member of the MPC who was as recently as this summer voting for a rise in benchmark borrowing costs, heightened financial markets' belief that UK base rates were set to fall all the way to zero.
The MPC has slashed UK base rates from 5% in early October to 2%. The Federal Reserve last week cut benchmark US interest rates from 1% to between zero and 0.25%.
Sterling fell to 75.7 on its trade-weighted index against a basket of currencies yesterday. Bank of England records for this index date back to 1990.
The pound also went close yesterday to the all-time low of 95.56p which it recorded against the euro on Thursday night, falling as far as 95.24p during the session. This continued weakness reinforced financial markets' belief that sterling parity with the euro may not be far away. The single currency was worth less than 67p as recently as July last year.
Sterling remained under pressure against the US dollar yesterday.
It fell as low as $1.4688 during the session, from a pre-weekend close of $1.4867. Sterling had by last night recovered to about $1.4850, although this is way adrift of the $2-plus levels at which it was trading as recently as July this year.
Gieve said the UK needed some form of new tool beyond the "blunt instrument" of interest rates and his colleague, Tim Besley, said monetary policy was not enough to revive the economy.
Gieve told BBC1's Panorama programme: "We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy ... and individual supervision and regulation of individual banks.
"Maybe we need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand."
Besley signalled further significant cuts in UK base rates were on the agenda as the MPC attempts to ward off any threat of deflation.
He wrote in a newspaper yesterday: "While falling prices might seem like a good thing, they would also lead to falling wages or rising unemployment. To make sure that inflation is not below target in the next year or even longer, the cuts in the official (base) rate need to have an impact."
The MPC is tasked by the Treasury with achieving annual UK consumer prices index inflation of 2%.
Highlighting the need to supplement interest-rate cuts with other measures to bolster the economy as output tumbles, Besley declared: "There is no quick or easy fix for where we are now. What we need is a measured approach, combining policies that deal with the challenges collectively."
