KEY POINTS:
The plummeting pound will not be propped up by Government intervention, ministers declared yesterday, as it emerged that they will simply hope Britain's beleaguered currency stabilises as broader measures to stimulate the economy begin to take effect.
Sterling has fallen to a series of record lows against the
euro in recent days, and looks set to reach parity with the single European currency for the first time. Its fall has hit holidaymakers as well as the thousands of Britons living on the Continent, who have seen the value of pensions and savings plummet.
But ministers have made it clear no help will be forthcoming to stabilise sterling. The Europe Minister, Caroline Flint, confirmed the value of the pound was not a "first-order issue" and Yvette Cooper, Chief Secretary to the Treasury, said bolstering the currency had never been the Government's aim.
Senior Government figures are wary of mistakes made in the lead-up to Black Wednesday in 1992, when attempts by John Major's Government to prop up the pound failed and led to a bill thought to be more than 3 billion.
The rising spectre of deflation, now discussed as a possibility by the Treasury, is seen as a greater threat to the economy. Official figures published this week are expected to show that inflation slumped last month to under 4 per cent, compared with 4.5 per cent in October.
So ministers must cross their fingers as the Government's 20 billion ($54.6 billion) fiscal stimulus package, which includes a temporary cut in the rate of VAT, kicks in.
"We have never had a policy of targeting the pound. Our policy has been to target inflation," Cooper said yesterday. "Previous attempts to target exchange rates caused all kinds of problems."
She said the fall in the pound had been caused by "uncertainty in the world economy" and that the Government was "plotting a course" to help Britain emerge from the crisis intact.
Flint said international co-operation, together with reviving bank lending, were the best methods of breathing life into the economy, which would in turn restore faith in the pound.
"We have got to get those first-order issues right in order to have a better look at issues around the exchange rate," she said. She was optimistic that the pound would begin to stabilise again "if we get those other factors right".
Critics of the Government said the apparent flight from the pound had been caused by the Government's unaffordable spending package, coupled with rising national debt.
A 2.5 per cent cut in interest rates in just two months by the Bank of England has also sent Britain's bank rate below that in the eurozone.
Serious concerns about the value of the pound developed over the weekend after it emerged that holidaymakers at airports and on Britain's high streets were already being offered an exchange rate very close to parity.
While the Treasury has faith that its fiscal package, which was announced by Chancellor Alistair Darling last month, will ease the recession and stabilise the pound, the Conservatives blamed the spending package for the sterling's woes.
"The Government says it will not step in as the pound slides to parity with the euro, but it is this Government's reckless intervention which has caused the pound's weakness," said the shadow chief secretary to the Treasury, Philip Hammond.
Others inside the party hinted that Labour would have to rethink its apparent abandonment of the pound once its effects began to be felt more generally. "However much Labour says a weak currency can be a good thing in terms of making it easier for some industries to export, we will all suffer from this in the long term," a senior Conservative source said.
The man at the helm during Black Wednesday, Sir John Major, also said the Government was wrong to rely on a fiscal stimulus deal. "What the Government is doing is ensuring that our recession is longer and deeper than everyone else's," he said.
Some in the City said they could already foresee a time when the pound, worth 1.40 just a year ago, would dip below one euro. Analysts have also begun to discuss the possibility of Britain adopting the euro, or pegging the value of the pound, to prevent its falling any further.
"The euro is becoming the darling of the currency market," said Martin Slaney, head of derivatives at GFT Global Markets. "There's no confidence in the pound and I would not be surprised if it hit parity with the euro and even fell a bit below that."
The Government still believes that the agreement of an EU-wide stimulus deal last week worth 1.5 per cent of the EU's GDP will insulate it from accusations of recklessness.
David Cameron is due to give a speech on the Government's economic policy today, when he is again expected to point to the fall in the pound as further proof that Darling's fiscal stimulus is seen as unaffordable by investors.
- INDEPENDENT