Sterling slips to new euro low

Dec 17 2008

The pound tumbled to a new record low against the euro after it was revealed that Bank of England rate-setters considered even larger interest rate cuts than the 1% delivered two weeks ago.

Minutes of the Bank's Monetary Policy Committee's latest meeting gave strong signals of further deep rate cuts to come and traders a fresh reason to dump sterling.

This left the pound falling below 1.10 euros - piling on the misery for holidaymakers planning festive trips to Europe.

The fall brings the pound ever closer to parity against the euro, although many tourists are already facing a one-to-one rate after high street charges and commission are taken into account.

Currency markets were panicked after the Bank's Monetary Policy Committee (MPC) said a deeper cut could be justified by the scale of the recession danger facing the UK.

"Financial markets had priced in a cut of 100 basis points and there was a risk that going further could cause an excessive fall in the exchange rate," the minutes said.

UK interest rates already stand at 2% - equalling the all-time low - after deep cuts in the past two months but Wednesday's comments make further reductions virtually certain. Borrowing costs in the Eurozone stand higher at 2.5%, boosting the pound against the euro.

Sterling enjoyed better fortunes against the dollar in the wake of Tuesday night's historic interest rate cut from the US Federal Reserve. The pound rose as high as 1.57 against the greenback as the Fed slashed rates to between 0% and 0.25% to stave off a prolonged US slump.

The currency later eased back but still stands 10 cents above the six-and-a-half-year low below 1.45 seen earlier this month when the Bank last cut rates. But the UK's economic woes mounted on Wednesday as claimant count unemployment topped one million for the first time in eight years after jumping at its fastest monthly rate since 1991.

Capital Economics' chief European economist Jonathan Loynes said: "December's MPC minutes and the latest labour market data support the view that the Monetary Policy Committee could soon be following the US Fed in cutting interest rates very close to zero."