Sterling slumped to its lowest level in more than five months this morning after Mervyn King, the Governor of the Bank of England, appeared to back a weak UK currency.

Speaking to The Journal, a newspaper covering the North East of England, Mr King said that the significant decline in the value of sterling in recent months “will be helpful” to rebalance Britain’s economy by helping to boost exports.

The pound dropped by 0.8 per cent against the dollar to $1.6202 as the market interpreted his comments to mean that Mr King is comfortable with the falling pound, which has declined by almost a quarter against other major currencies in the past two years. The pound also fell 1 per cent against the euro to 91.04p.

He said: “The fall in the exchange rate that we have seen will be helpful to that process but there’s no doubt that what we need to see now is a shift of resources into net exports – whether directly or in producing things that compete with imports.”

Mr King continued, by expressing the note of cautious optimism that has characterised his recent statements relating to Britain’s fragile economic recovery. He said: “Output has stabliised. There are some signs that growth may be beginning to pick up. But we shouldn’t get too carried away by this. This is clearly very small growth after a very large fall and unemployment has risen so it’s a difficult challenge ahead."

Howard Archer, chief UK and European economist at IHS Global Insight, said: “I interpret Mervyn King’s comments as saying that a lower pound would be desirable – and I agree with him.

“Despite its slump, I am still surprised the pound is as high as it is and this could be potentially damaging for the economy,” Mr Archer added.

Mr Archer believes that the pound will continue to fall because huge government borrowings and rising unemployment mean that the outlook for the British economy remains bleak.

Mr King’s comments came a day after the Bank of England warned that Britain’s tentative recovery could be a “false dawn”, despite issuing a relatively upbeat economic forecast.

According to the minutes of the Bank’s latest interest rate meeting this month, published yesterday: “There had been a number of developments during the month with positive implications for the short term. But the lesson from previous financial crises was that they were not resolved quickly, and that there could be false dawns.”

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