The pound dropped below $2 for the first time in three months today as money-market rates fell sharply in the wake of signals that there are more interest rate cuts to come in the UK.
The pound was changing hands at $1.9999 after minutes from the Monetary Policy Committee's (MPC) December 6 meeting suggested an aggressive round of interest rate reductions from the Bank of England.
The one-month sterling London Interbank Offered Rate (Libor) fell to 6.30 per cent from 6.49 per cent, the biggest one-day drop in five years, according to Reuters data.
Minutes from the MPC's meeting this month showed that the group had been taken by surprise by the severity of the housing downturn, before voting to reduce interest rates by a quarter-point to 5.5 per cent.
The minutes state: "The slowdown in the housing market seemed more pronounced than expected. And commercial property prices had fallen further."
Last month Nationwide, the building society, revealed that house prices in November had fallen at their steepest rate in 12 years, while a Royal Institution of Chartered Surveyors survey of price expectations showed the sharpest decline since the series began.
On choosing to reduce borrowing costs, the MPC concluded that the continuing effects of the credit crunch outweighed higher inflation forecasts and cost pressures.
The minutes said: "... the worsening financial market turmoil, and the consequent tightening of credit conditions, had increased the downside risks to activity and inflation in the medium term. Signs of slowing growth in the industrial world were already apparent."
Howard Archer, chief European and UK economist at Global Insight, said: "The 9-0 vote in favour of December's interest rate cut and the general tone of the minutes indicate that another interest rate cut early in 2008 is very much on the cards.
"The MPC has clearly become significantly more concerned about the growth outlook and the dampening impact of the credit crunch, and is prepared to act despite ongoing concerns about near-term inflation risks."
The Bank of England yesterday attempted to redress frozen credit markets by auctioning £11.35 billion, mainly at a maturity of three months, which was fully-subscribed. Three-month Libor, the inter-bank lending rate, fell from 6.43 per cent to 6.39 per cent in its fourth successive daily reduction.
This month's interest rate cut marked the first time that the Bank reduced its base rate in 18 months.
In November the MPC voted 7-2 in favour of holding rates at 5.75 per cent, with Rachel Lomax, the deputy governor for monetary policy, and David Blanchflower voting in favour of an early cut.