MPC minutes reveal fears over sterling slowed interest rate cuts

Sterling slumped to yet another fresh low against the euro yesterday, against a background of further bleak news on the economy and more evidence of the determination of the Bank of England to follow the US Federal Reserve and cut interest rates to close to zero early next year.

The Minutes of the latest meeting of the Bank of England's Monetary Policy Committee were published yesterday, and revealed that it considered cutting rates by "at least 100 basis points" [one percentage point], and might have done so were it not for concerns about the weakness of sterling.

"Financial markets had priced in a cut of 100 basis points and there was a risk that going further could cause an excessive fall in the exchange rate," the minutes said. In the event the MPC voted by 9 to 0 to reduce rates by 1 per cent to 2 per cent, a 57-year low. At the November meeting the MPC cut rates by a startling 1.5 percentage points.

However, few believe that qualms about the currency will prevent further aggressive cuts. Most economists see rates declining by between 0.5 and 1 percentage point at each of the next two monthly meetings – to close to zero. At that point, the Bank may also run to "quantitative easing" or "unconventional measures", injecting money directly into the economy, for example by purchasing government securities or the so-called "toxic debt" held by the banks which is widely held to be hampering their lending activities.

In his open letter to the Chancellor on Tuesday, the Bank's governor, Mervyn King, dropped a heavy hint that such measures and further state assurances on bank lending were being sundered: "Additional measures, building on the Government's package to support the banking system announced in October, will probably be required to underpin lending to households and companies".

Mr King has said that the constriction of bank lending is the biggest single danger facing the economy. During testimony to MPs last month, he floated the idea of pulling together the existing ideas – the £250bn bank Credit Guarantee Scheme, the Crosby proposals to revive the mortgage-backed securities market, and the various small business loan support arrangements, into an overall guarantee system.