Low level of pound 'no reason not to cut rates'

Published on Sunday 24 August 2008 21:33

STERLING'S fall against the dollar should not be used by the Bank of England as a reason for putting off an interest rate cut, an influential independent economic forecasting group warns today.

The Ernst & Young ItemClub argues that the recent drop in sterling against the dollar – it is down to its lowest level for two years – should simply be accepted by the Bank's monetary policy committee (MPC).

In a research note, the group says the currency's movement should "not be seen as a bar to it cutting interest rates in the autumn in response to the deteriorating UK economy".

According to the Item Club, the MPC has frequently worried about the impact of a falling pound on inflation prospects and, for this reason, a declining exchange rate is often seen as deterring it from cutting interest rates.

The group argues that in trade-weighted terms, sterling has only fallen by about 2 per cent since mid-July, compared to a 13 per cent fall in the previous 12 months.

It says that with a fall in oil prices, the "net impact of recent exchange rate and commodity price moves taken together is favourable for inflation prospects".

Hetal Mehta, senior economic adviser to the group, said: "The main worry the MPC should have about the fall in sterling is whether it will have a significant positive impact on growth."

She added: "There is worrying evidence that UK manufacturers are preferring to use the lower pound as cover to raise their prices and profit margins, rather than to expand market share and production volumes."