Pound keeps plummeting as zero-rate is predicted

Sterling fell 1.34 cents against the dollar to $1.4636, a six-and-a-half year low, and has now lost more than a quarter of its value against the greenback since peaking above $2 in the summer.

The pound was also down sharply to a record low against the European single currency, with the euro up 0.74p to 86.34p, and hit a 13-year low against the yen, trading at 134.07 against the Japanese currency.

The slump came after the Bank of England monetary policy committee cut interest rates from 3% to 2% and warned "the downturn has gathered pace" since it slashed rates by 1.5 percentage points from 4.5% last month.

It said spending by consumers and investment by business has "stalled" but added that the weak pound would help prop up demand for exports as the rest of the world economy also suffers recession. "The further depreciation in sterling should moderate the impact of weaker global growth on the UK," said the Bank.

Rates have not been below 2% since the Bank was formed in 1694 but economists said it was now only a matter of time before they are cut again.

Howard Archer, chief UK economist at Global Insight, said: "We expect the Bank to reduce interest rates to 1.25% in January, and would not rule out a larger cut if the economic downturn continues to deepen. We now expect interest rates to fall to a low of 0.5% in the second quarter of 2009 and then stay there for the rest of the year. However, it is not inconceivable that interest rates could come all the way down to zero."

Richard Curr of contracts-for-difference broker Blue Index said further rate cuts "are bound to put considerable pressure on the value of sterling", and warned the pound could slump to $1.30 against the dollar and to parity with the euro.

"We suggest being short on sterling during the next few months until these levels are achieved," he said.

In a statement today, the Bank admitted actions taken so far by the Government to unblock the frozen credit markets and kick-start lending by banks have failed.

"Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult," it said. "The committee noted that it was unlikely that a normal volume of lending would be restored without further measures."

The Bank also warned inflation was likely to fall below the 2% target next year, and even into negative territory, having retreated sharply from its peak of 5.2% in recent weeks.

The City welcomed the rate cut but said it would continue to put pressure on the ever-weakening pound. "They had to do something larger than a half-point cut," said George Buckley of Deutsche Bank. "This reflects concerns about the state of the economy. They will have to cut rates again in January and the pound is going to remain under pressure."