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Friday, May 7, 1999 Published at 07:27 GMT 08:27 UK

Business: The Economy

Talking down the pound

As UK interest rates are being left unchanged, the BBC's Chris Giles says the Bank of England tries a new method to fight the strong pound - talk it down.

[ image: Chris Giles]
Chris Giles
The Bank of England made it quite clear on Thursday that interest rates are bottoming out. They might go down a bit further but the Monetary Policy Committee (MPC) are now happy that their interest rate cuts since October have helped the economy avoid a recession.

The main problem now is that interest rates are still at this level make the UK a very attractive place for hot money lows and this is keeping the pound high and hurting exporters. A combination few people think is good for the economy.

Basking in their reputation for sensible policy decision, the MPC seems to have be banking on a novel way to get the pound down without cutting interest rates further.

Simply talking the pound down.

In a statement they released, the MPC said they might cut rates further if the pound didn't fall.

For the markets the message was clear. Either sell the pound until its value falls to a more sustainable level or let the pound stay high and suffer lower returns from holding sterling because the Bank of England will cut rates again.

The pound fell sharply in the first minutes after the statement but in later trading on Thursday it recovered all the lost ground against the Euro.

The problem with trying to talk the pound down is an age old one in economics. Unless the markets believe the MPC would really cut rates, there is no point in selling sterling. And its clear from the market reaction today, the MPC doesn't yet have the credibility to talk the pound down.

The MPC might well find it's lucky though. Economic signals from Europe have become a little more positive in the last few weeks.

This might help the Euro boost its value and get the MPC what it wants.

But that would just be chance. Until then, the MPC are finding words alone are not enough to make economic policy.

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