Pound slumps as markets bet on Bank printing more money

Sterling slumped to just over 1.12, days after hitting levels not seen since April as markets took the opinion that further money-boosting measures were increasing likely.

The drop in September retail sales prompted further calls for policymakers to boost the £200 billion quantitative easing programme to help support economic recovery. Minutes from the October meeting of the Bank's Monetary Policy Committee showed that member Adam Posen voted in favour of raising the level of QE by £50 billion.

Bank Governor Mervyn King also hinted at so-called QE2 to prevent a double dip recession when he delivered a speech in the West Midlands on Tuesday.

A second bout of QE would mean putting more pounds into circulation, which has depressed sterling, sending it down against the euro and the dollar in recent weeks - at $1.57 today.

While a weaker pound could lead to exports picking up, it also means higher material and energy costs, which could be passed on to the consumer.

Michael Hewson, market analyst at CMC, said some investors were concerned that the Bank could inject another £50 billion of stimulus at the next meeting in November.

But he added that this seemed unlikely: "The decline in retail sales could just be a brief pause ahead of a pre-Christmas pick-up ahead of the VAT rise in January next year, as consumers hold back on spending until the lead up to the festive season."

Economists have said it is also likely that further QE will be required to offset the impact of George Osborne's spending review.

The Government has announced an £81 billion package of cuts, which includes a £7 billion hit on welfare and some 490,000 public sector job cuts.

Kathleen Brooks, research director at Forex, said: "After the spending review and a three-way split on the Monetary Policy Committee, expectations have risen that UK growth will be uneven going forward and could be extremely weak as we move into 2011.

"The prospect of further QE from the Bank of England to plug these growth gaps possibly as early as its next meeting is now the focus in the market. This leaves sterling vulnerable to further weakness going forward."