Sterling fell for the second straight session on Monday after the surprise revelation that the Bank of England considered cutting UK interest rates earlier this month.

The minutes of the December meeting of the Bank's Monetary Policy Committee showed a discussion about cutting rates was prompted by the growing possibility of inflation undershooting its 2 per cent target in two years' time. The risk of a global economic slowdown had also risen since November, according to some committee members.

After five rate rises since November 2003, there was no discussion of any further tightening.

Amid a slowing housing market and worsening government finances, analysts are increasingly factoring in UK rate cuts in 2005, a view reflected in a rally in short-sterling futures yesterday.

With the US expected to continue raising rates next year, and the eurozone unlikely to move much either way, sterling's yield differential is likely to be eroded, potentially resulting in capital flight.

With this in mind, the pound slid 0.7 per cent against the dollar, euro and Swiss franc to $1.9128, £0.6992 and SFr2.2101 respectively, and fell 1 per cent to Y198.90 against the yen.

Mark Cliffe, chief economist at ING Financial Markets, argued the MPC was likely to face pressure to cut rates as soon as March, with at least two rate cuts likely in 2005. He sees sterling falling to $1.84 against the dollar and £0.73 versus the euro by December 2005.

Ian Stannard, currency strategist at BNP Paribas, is more bearish still, forecasting rates of $1.78 and £0.76 in 12 months' time.

Most major currencies were little changed. Third quarter US gross domestic product growth was revised up a fraction to 4 per cent, but, says Mike Berg of the consultancy 4Cast, "GDP was adjusted by the smallest of amounts and the market's reaction was to react in the smallest of ways".

The yen inched 0.3 per cent higher to Y103.97 against the dollar after Japanese export growth rose to 13.4 per cent in November, from 11.7 per cent in October, "easing concern about stalling global demand cutting Japan's growth prospects", said Chris Gothard, currencies strategist at Brown Brothers Harriman.

However, the Canadian dollar slipped 1.4 per cent to C$1.2437 against the greenback, with 4Cast attributing the sell-off to profit-taking after the loonie's strong run this year.

The Polish zloty rose to a new near two-year high of 4.0726 zlotys against the euro, with Poland's finance minister, Miroslaw Gronicki, appearing relaxed about recent gains, which have taken the zloty's rise against the euro this year to 13.6 per cent.

But the Slovak koruna reversed its recent rally, slipping to SK38.726 to the euro, on reports that the central bank had intervened in the market.

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