Pound falls to five-year low as Bank plans to cut rates again

It dropped more than seven cents to as low as $1.620 overnight, its weakest point since September 2003, after Bank of England Governor Mervyn King warned last night that the British economy is entering its first recession for 16 years. By lunchtime it stood at $1.6344, down 6.36 cents.

The Bank is expected to cut rates again, probably by another half point, when it meets again in two weeks. Interest rates were cut to 4.5 per cent this month.

Investors are piling out of sterling because they fear British interest rates will be cut dramatically in the coming months and over concerns that the British economy is in worse shape than previously thought.

The collapse in the value of the pound will make holidays to America and destinations with currencies linked to the dollar such as the Caribbean much more expensive. A spokesman for the Association of British Travel Agents said: "Travel to America is very sensitive to currency fluctuations. This time last year the rate was over two dollars and everyone was saying 'let's do our Christmas shopping in New York'.

"Well, the reverse is true this year. The good news is that as the number of bookings go down you will see airlines reduce their fares." But the weaker pound is likely to be good for tourism in London with more high-spending Americans coming. It will also be welcomed by British exporters as it makes it easier to sell their goods abroad.

The pound had been above $2 for much of last year and early this year, peaking at around $2.10 a year ago. It was also weaker against the euro today, falling almost a penny to 78.64p

In the City the FTSE-100 was down 145.91 points at 4083.82 at lunchtime. There was more bad news for the economy when the Bank of England published the minutes of its emergency meeting this month when the base rate was cut.

The minutes reveal that the outlook for the British economy has " deteriorated substantially" over the past month. City economists said they expected sterling to fall further in the coming weeks.

Hans-Guenter Redeker, of BNP Paribas in London, said the prospect of aggressive interest rate cuts to bolster UK growth meant the pound will fall to $1.55 by the beginning of 2010.

George Buckley, of Deutsche Bank, said the fall in the pound was no surprise: "The economy is highly linked to what is happening in the housing market and the banking sector."

Simon Hayes of Barclays Capital said Mr King's remarks "were pre-empting an explicit forecast of outright recession in the November inflation report in a few weeks."