The pound continued its climb against the euro this morning, hitting a new 19-month high as foreign exchange dealers applauded a strong British Budget and ran from the weakening eurozone economies.
There are also concerns that European banks must repay €442 billion (£360 billion) to the European Central Bank on Thursday, leaving a potential liquidity shortfall in the financial system of more than €100 billion.
That fear over the strength of the eurozone also weighed on stock markets and commodity prices as investors sought safe havens, with London’s FTSE 100 falling below 5,000, down 2 per cent or 100.94 points at 4,970. Copper fell 3 per cent in London trading and oil fell as much as 1.7 per cent below $77 a barrel. The falls were mirrored by Germany’s Dax and France’s CAC 40 indices both down 2 per cent.
The euro dipped to 80.93p in early trading, its lowest level since November 2008 and down from 86.60p yesterday, as funding pressures in the eurozone re-emerged and interbank lending rates hit their highest level in almost seven months.
The pound has also rallied against the dollar in recent days amid fears that the US will not be as stringent as Britain in cutting its budget deficit.
Advertisement
After months of being battered around the world, sterling has now stabilised at above $1.51, its best rate since April and far above the 14-month low of $1.42 in mid-May.
Sterling was further boosted yesterday when Andrew Sentance, a member of the Bank of England’s rate-setting committee, renewed his calls for an interest rate rise despite the tough fiscal plans laid out in the Budget.
This month Mr Sentance became the first member of the Monetary Policy Committee for almost two years to vote for a rate rise. Yesterday he said: “I don’t think \ changes my view, partly because the tightening put forward is not far off expectations before the Budget. We should gradually withdraw some of the monetary stimulus.”
His remarks came as the Bank for International Settlements said that interest rates would have to start to rise to head off asset price bubbles like those seen before the financial crisis. It said that keeping interest rates low for too long could increase the risk of a surge in prices as investors searched for better returns.
“While policymakers can and should address such risks with other tools, they may still need to tighten monetary policy sooner than consideration of macroeconomic prospects alone might suggest,” the bank’s report said.
Advertisement
“Low policy rates may slow down or even hinder necessary balance sheet adjustments. Keeping interest rates very low comes at a cost — a cost that is growing with time.”
In a boost to the Government, the bank also urged policymakers to unwind stimulus programmes and attack soaring deficits, warning that private debt was simply being replaced by massive government liabilities in some countries.
While it credited support measures from preventing contagion during the financial crisis, it said that they were now sapping confidence by delaying much-needed adjustments in the real economy and financial sector.