The Governor of the Central Bank Mervyn King also made a statement, following speculation that the BoE will cut the rate it pays financial institutions on deposits. King said that the weakening Pound was "helpful" to the process of rebalancing the economy. The Prime Minister Gordon Brown declined to comment on the Pound's decline, although he told reporters that he welcomes "all the factors that make for a stable economy".
The Pound has declined nearly 7% against the Euro since June and appears to have been driven lower by the tone and language used in a number of statements from Bank of England policy makers. King also said in an interview yesterday that two British banks got within hours of a liquidity shortfall on October 6th 2008, the day the financial system came to the brink of meltdown.
Lutz Karpowitz, a currency analyst at Commerzbank, wrote in a report yesterday that "a currency, (the Pound) which the country's own central bank like to see weak, obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust."
The Pound fell 1.5% against the Euro on Thursday, the weakest level since April 3rd, and is likely to fall even further, after breaking through long-term trend support at 1.1270 earlier this month. The UK currency also fell after the Daily Telegraph reported that two policy makers called economists to a "crisis meeting" this week to discuss the Pound's decline and the Bank's quantitative easing policy.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that "the press reports regarding the economists' meeting next week could be indicating that issues such as the deposit rate cut are back on the table. The market is putting two and two together and seeing the plumbing or the pipes of the UK financial system are still a little gummed up."
King told the UK Treasury select committee earlier this month that policy makers were considering cutting the rate paid to financial institutions on deposits, which is currently at 0.5%. The Bank of England may still loosen its policy stance further and begin with withdrawing excess liquidity from the UK financial system in the third quarter of 2010.
Elsewhere, the Pound also lost ground against the Dollar and plummeted to a fresh 12-year low versus the Australian Dollar, after UK stocks declined on the week. Reports in the U.S showed that existing home sales unexpectedly fell in August, while the Federal Reserve said that it will cut the size of two programs designed to bolster credit markets.
According to the latest estimates from Commerzbank AG, the Pound may weaken to 1.0630 versus the Euro by the end of the year, after King's comments increased speculation that the BoE is actively trying to weaken the Pound. The UK currency may fall further this week, especially if global stocks continue to fall, with a move towards 1.0526 versus the Euro a possibility.
The minutes from the Bank's last policy meeting were also released last week, where policy makers voted unanimously to keep bond purchases on hold in September. In a dramatic u-turn, the governor of the Bank of England Mervyn King agreed to support the majority of the MPC, despite his recommendation for a more aggressive increase in August. King and David Miles both switched sides and joined the unanimous vote for no change in the plan, arguing that cohesion was better for the time being, even though a higher amount may be warranted.
King and Miles has sought as much as £200 billion at the August decision but all nine policy makers opted to keep the benchmark interest rate unchanged at a record low of 0.5%. The Confederation of British Industry have raised its forecast for economic growth in the third quarter and predicted that the Central Bank may cap its program at the current level, after buying the allocation of newly created money.
The language used in the minutes, however, did suggest that a further extension in the asset purchase program may be justified in the future. Policy makers adjudged that "in the absence of significant news about the medium term, the case for adjusting the program now was outweighed by the benefits of following through with the program."
The Pound also fell on Friday, as world leaders at the G-20 meeting united behind a plan to regulate banker pay and tighten capital regulations for financial institutions. The UK currency dropped below $1.60 for the first time since July 8th, after U.S officials said Group of 20 leaders are closer to a "broad agreement" on a plan to tie compensation more closely to risk.
The UK currency dropped by the most since April against the Dollar on Thursday, following comments from the Bank of England that the Pound's depreciation is 'helpful'. Steven Barrow, head of G-10 currency research at Standard Bank Plc, said that "sentiment is pretty poor for Sterling. It comes down to what King was saying, at the G-20, there are issues of bonuses and bank capital."
The Pound also declined after reports in the U.S on Friday showed that durable goods orders unexpectedly fell in August, signaling that companies are curbing spending and the economic recovery may falter. In terms of economic data, the focus this week will fall on September's manufacturing index, while mortgage approvals and house prices are expected to show further signs of improvement.
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