Bank of England policymaker Kate Barker helped send sterling to a level against the dollar not seen in 26 years when she indicated that UK interest rates will remain unchanged in the near term.

On a visit to Guernsey on Monday, Ms Barker indicated that attitudes on the committee toward interest rates have not changed much since August.

Economists had expected Governor Mervyn King and the rest of the Monetary Policy Committee to reduce the current 5.75 per cent rate because of signs of a slowing housing market and tighter lending.

A London-based trader told Reuters: “The way the MPC view it is that rates need to come down but things need to slow down first. I think what the market’s priced in, and what most banks are expecting - a cut in February or March - looks about right.”

Sterling jumped almost half a cent to $2.0668 in London.

Meanwhile, the US dollar has halted its slide ahead of a two-day meeting of the Federal Reserve due to start later today, at which an interest rate cut is widely expected.

The oil price also retreated today after spiking to a record high, temporarily allaying fears that it could reach the $100 a barrel mark.

Koichi Ogawa, chief portfolio manager at Daiwa SB Investments told Reuters: “Investors stand on the sidelines as they cannot yet predict what the market reaction, especially in New York, will be like after the widely expected rate cut.”

The Fed is expected to agree on a quarter-point cut in borrowing costs to 4.5 per cent tomorrow in an attempt to minimise economic damage from a spiralling housing slump and credit market problems.

There have been reports that the cut could be as much as half a percentage point.

US light crude soared to $93.80 a barrel yesterday, largely because of ongoing political tensions in the Middle East, but settled at $93.53.

The US dollar’s trade-weighted index against six major currencies edged up 0.1 per cent to 76.914 after having slid to 76.777 on Monday, the lowest in the index’s more than 30-year history.

Gold also dropped back from a 28-year high, where it had come close to $800. The price fell back to $785.30.

One source at a European bank said: “The market is very nervous right now before the Fed’s decision, because even when the market is widely expecting a 25-basis point rate cut, there are still some risks for other scenarios.”

Investors are also awaiting the results of a policy meeting of the Bank of Japan tomorrow, which is expected to maintain interest rates at 0.5 per cent.

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