Bank of England warns against devaluing sterling

A senior official from the Bank of England has hit back against reports advising that the pound should be reduced in value if the manufacturing sector is to emerge from recession.

The Ernst & Young Item Club recently called for greater focus on devaluing sterling, warning that UK exports suffer from the uncompetitive strength of the pound – and that the Bank of England’s emphasis on interest rate cuts would bring no lasting solution to the woes of the manufacturing sector. Instead, the Item Club stated that demand could be “better achieved through a lower exchange rate” – simultaneously preparing the country for possible entry into the Eurozone and the adoption of the single currency.

Speaking in response, the Bank’s director for Europe, John Townsend, said that any devaluing of the pound would lead to increased inflationary pressures, and that the true issue lay in the underperformance of the euro.

It has been estimated that if sterling is not artificially reduced, the euro could need to rise by 10 per cent before UK entry into the eurozone becomes a feasible option - and it is thought that the Bank of England would prefer to wait for such a situation rather than move now to change the pound, thereby disrupting the pound/dollar exchange rate.

Mr Townsend added: “Virtually everyone suggests that a lower exchange rate against the euro would be required for entry – indeed it is one of those very few things that almost all economists appear to agree on.” (CL)