Prospect of interest rate cut sees pound take a tumble

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Yesterday's shocking report from the Bank of England, which predicted banks will massively rein in how much they lend to people, put the markets on red alert for a second rate cut in as many months.

Economists fear that, if the banks scale back their lending, it will have a dramatic impact on the amount of consumer spending and the already-stagnating property market.

Today's regional survey from the Nationwide building society showing London house prices cooling served to stoke up those concerns. That could ease serious worries among the members of the Bank's monetary policy committee about inflation and make them prepared to cut rates beyond the current 5.5%.

However, with the oil price rocketing, and agricultural goods inflation pushing up the price of groceries, next Thursday's decision by the MPC is far from certain.

But most economists think there will be at least one quarter percentage point cut in the first three months of the year. Predicting such cuts, investors have pushed the pound repeatedly to all-time lows against the euro in recent sessions. It has also fallen back spectacularly against the heights it saw before Christmas against the dollar.

Today sterling was down 0.16 of a cent at $1.9694 and off 0.05p against the euro at 74.75p.

"General bearishness regarding sterling is being perpetuated again today," said Jeremy Stretch, strategist at Rabobank. "There are concerns about the interest rate environment and at the same time there are inflationary pressures, so the balancing act for the Bank of England is getting more difficult."