Pound slides as bets go on a new interest rate cut

Sterling fell 1.66 cents against the greenback to $1.9574 and against the single currency, making a euro worth 78.83p following another wave of dismal news on the British economy.

It came as members of the Bank of England monetary policy committee were meeting in Threadneedle Street amid growing speculation it is on the verge of its first back-to-back rate cut for almost seven years.

The Bank cut rates last month from 5.25% to 5%, and until this week was widely expected to wait for June before moving again. However, economists today said the decision was now on a knife edge.

Howard Archer of Global Insight said: "The interest rate decision is finely balanced and impossible to call with any degree of confidence."

Official figures today showed manufacturing output fell by 0.5% in March - its sharpest decline in six months. It came as a shock to the City after two months of steady growth, and was blamed in part on a slump in car production. The MPC was also poring over figures from the Nationwide, showing consumer confidence has fallen to its lowest in four years.

Rising household bills and the weakening housing market mean people feel less confident than at any stage since the survey began in May 2004. The numbers were the latest in a run of downbeat assessments of the economy, following on from grim news on the service sector yesterday.

The service sector includes everything from hairdressers, hotels and restaurants to brokers and accountants, and suffered its worst month since the start of the Iraq war in 2003.

Alan Clarke of BNP Paribas said: "There has been a last-minute flurry of disappointing UK economic data, prompting the obvious question, could the MPC cut tomorrow? We know the committee tends to be reluctant to deliver back-to-back rate moves. One reason for that is the fear that it will cause the market to extrapolate the move and price in even deeper cuts. We doubt the MPC wants the market to price in more aggressive easing."

The MPC is also concerned about inflation, which is at 2.5%, above the 2% target, and threatens to breach the 3% mark in the coming months.