Last updated: March 15, 2013 8:52 am

King sounds alarm over sterling’s fall

Bank of England Governor Mervyn King arrives at PortCullis House to give evidence over Banking Standards.©EPA

Sir Mervyn King has sounded the alarm over sterling's vertiginous fall, saying the decline had gone far enough.

In an abrupt change of tone for the outgoing Bank of England governor, Sir Mervyn said sterling was now “properly valued”, reflecting fears that the rapid fall in the pound this year will raise inflation and squeeze household budgets further.

Since the autumn, the governor has repeatedly talked down the pound, leaving sterling almost 6 per cent lower against Britain’s main trading partners than at the start of the year. But in a sign he now thinks things have gone far enough, he told ITV News: “We are moving to a properly valued exchange rate. I think we’re probably there”.

“Basically we’re at the same level [of sterling] we were after the impact of the financial crisis,” he added last night. “We’re certainly not looking to push sterling down. We’re looking to ensure recovery in the UK economy and gradually bring inflation back to our 2 per cent target.”

The governor’s words are in stark contrast to his utterances in the autumn and earlier this year and helped sterling rise a little against the dollar on Friday morning.

In November, he said sterling’s rise in 2012 “was not a welcome development”, reiterating in January that the 25 per cent fall in sterling since 2007 before its rise last year “was certainly necessary for a full rebalancing of our economy ”.

On Friday the pound was up 0.3 per cent at $1.5122 against the dollar. Meanwhile, sterling continued to ease against the euro, down 0.2 per cent to £0.8609. It has fallen more than 3 per cent against the eurozone currency in the past 12 months.

Sir Mervyn’s comments indicate that the BoE thinks sterling’s plummeting value this year has gone far enough and enables him to be more upbeat about wider economic prospects.

In much more confident comments on the UK economy than he has given for some time, the governor said the economy was about to start growing again. “There is momentum behind the recovery that’s coming,” he said.

Sir Mervyn also continued to lend his weight behind George Osborne’s strategy of fiscal consolidation alongside monetary activism. “The strategy was based on a gradual shift back to reducing the budget deficit and as a consequence, the BoE will have the responsibility for trying to support the recovery. That’s the strategy. I totally agree with it.”

Additional reporting by Neil Dennis

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