Sterling descends and Bank of England Governor helps to talk it down

Sterling slumped to its lowest level against the euro in more than five months after Mervyn King, the Governor of the Bank of England, appeared to back a weak UK currency and reiterated concerns about the prospects of Britain’s recovery.

Speaking to The Journal, the Newcastle newspaper, Mr King said that the significant decline in the value of sterling in recent months “will be helpful” in rebalancing Britain’s economy by helping to boost exports.

His comments sent the pound down by 2.1 per cent against the dollar to $1.6066, and by 1.5 per cent against the euro to €1.09. The market interpretation was that Mr King was comfortable with the falling pound, despite a decline of almost a quarter against other major currencies in the past two years. Sterling was hit further by renewed speculation that the central bank may cut the rate it pays on deposits to financial institutions, in an attempt to stimulate the economy by forcing them to lend more money.

Mr King said: “What we need to see now is a shift of resources into net exports — whether directly or in producing things that compete with imports.” He continued by expressing the cautious optimism that has characterised his recent statements on Britain’s fragile recovery. “Output has stabilised. There are some signs that growth may be beginning to pick up. But we shouldn’t get too carried away by this,” he said. “This is clearly very small growth after a very large fall, and unemployment has risen.”

David Buik, of BGC Partners, the broker, added: “I hear what Mervyn King’s saying about the weak pound being good for exports, but our manufacturing output has been terribly neglected. A fall in the pound will help things, but it’s going to be a long haul.”

Meanwhile, in an interview for the BBC Two documentary The Love of Money, Mr King revealed that two UK banks came within hours of collapse last October. He said the fall of Lehman Brothers in September last year froze credit markets and pushed Royal Bank of Scotland and HBOS to the limit on October 6 and October 7.

“Two of our major banks, which had had difficulty in obtaining funding, could raise money only for one week, then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day.”

He continued: “Individuals would not have had access to the money in that bank. Their deposits would have been frozen. The accounts would have not been there for salaries to be paid … In turn, they wouldn’t have been able to pay bills to businesses, so the businesses would have found that their flow of payments would have come to an end.” The Government pledged to put about £50 billion into the banking system on October 8, helping to stave off a meltdown. (Tom Bawden, The Times) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6848263.ece

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