Sterling hit a record low against a basket of currencies on Monday, after Bank of England policymakers said monetary policy may not be sufficient to shield the UK economy from the effects of the credit crunch. Against the euro, the pound fell 1.4 percent to trade not far off its recent low and leave parity in sight.
BoE Monetary Policy Committee member Tim Besley was quoted in the Daily Mail on Monday saying there was "no quick or easy fix" to avoid the consequences of the credit crunch and that measures other than monetary policy were needed. Separately, Deputy BoE Governor John Gieve said Britain needed some form of new instrument which would be more effective in managing the economy.
"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy... and individual supervision and regulation of individual banks," he told the BBC. The comments put further downward pressure on the troubled UK currency, which has been battered by the prospect of interest rates falling further in the UK than in the euro zone and worries about a sharply slowing economy.
"These were not comments of any substance, but the key is that the Bank of England did not understand the crisis," James Hughes, market analyst at CMC Markets said. "In a thin market, people have seen them as a reason to take sterling lower, and it seems only a matter of time before the euro gets to parity (with the pound)," he said.
At 0932 GMT, the euro rose 1.5 percent against the pound to 94.68 pence, edging closer to the record high of 95.56 pence hit on Thursday according to Reuters data. The falls against the currency of the UK's main trading partner took the pound to a fresh low of 76.1 on a trade-weighted basis.
Against the dollar, the pound dropped 0.4 percent to $1.4862. Sterling came under heavy selling pressure last week after Gieve said interest rates could fall to near zero, raising the prospect of the central bank having to resort to unconventional measures to boost the economy.