Sterling falls sharply in wake of MPC disclosure

Sterling fell sharply on currency markets yesterday after the Bank of England disclosed that its Monetary Policy Committee (MPC…

Sterling fell sharply on currency markets yesterday after the Bank of England disclosed that its Monetary Policy Committee (MPC) had considered the scope for engineering a decline in the currency's value by direct intervention on the markets.

The British currency has scaled new 10-year peaks in recent months in response to successive rises in British interest rates aimed at curbing rapid growth in consumer demand and house prices. But minutes of this month's MPC meeting published yesterday show that its members are increasingly worried that manufacturing businesses are suffering from the effects of the strong currency. Some MPC members argued for Bank of England intervention on the currency markets to reduce sterling's value, particularly against the euro.

If sterling retains its current resilience, there is a risk that British inflation will under-shoot the government's 2.5 per cent medium-term target, they argued. However, other committee members doubted whether intervention would be effective as there was little evidence that sterling would respond to Bank of England selling - and a failed attempt to influence the exchange rate would damage the MPC's credibility.

In the event, the MPC voted by an eight-to-one majority to lift British bank base rates to 6 per cent without asking for Bank of England intervention to lower sterling. Financial markets continue to believe that the MPC will lift bank base rates to a cyclical peak of 6.50 per cent in coming months before lowering rates later in the year in response to falling inflation. At the close, sterling was 50 points lower against the euro at 1.6012 and eight cents down on the US dollar at $1.6048.