Trade-weighted pound at 11-year low

Thursday, March 20, 2008

Sterling held at its lowest level in more than 11 years on a trade-weighted basis on Thursday as expectations for interest rate cuts mount and confidence in the banking sector and wider economy ebbs.

Pay settlements held steady in February indicating that building price pressures are not yet feeding through to wages, a survey from the consultancy Industrial Relations Services said on Thursday.

Minutes from the Bank's Monetary Policy Committee on Wednesday showed that Deputy Governor John Gieve unexpectedly joined David Blanchflower in voting for a cut in interest rates in March, heightening expectations of an imminent cut.

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"The Bank of England is taking a relatively hawkish view at the moment but wage growth is under control and interest rates are going to come down quite hard in the second half of the year," said Russell Jones, head of fixed income and currencies global research at RBC Capital Markets.

By 8:44 a.m. the pound had fallen 0.3 percent to $1.9775 <GBP=>. The euro edged down to 78.65 pence, but was still close to an all-time high of 79.12 pence set on Monday.

On a trade-weighted basis the pound opened at 93.1, matching its lowest level since January 1997 <=GBP>.

RBC's Jones said jitters on the health of the banking sector and how the government dealt with the demise of mortgage bank Northern Rock also fed into falling confidence on the economy and how it is managed.

"The pound has been overvalued for a long time and these problems have been a trigger for its correction," Jones said.

In further gloomy news for the pound, Bank of England policymaker Kate Barker said the credit crisis is making it more difficult for Britons to buy houses and affordability is unlikely to improve.

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