A senior Bank of England official has warned against artificially reducing the value of the pound.

The Bank's director for Europe, John Townend, acknowledged that sterling was "clearly overvalued, at least against the euro".

But, in a speech in Malaysia, he warned that a fall in the pound would create inflationary pressures.

The comments came shortly after Ernst & Young's economic forecasting group, the Item Club, called on the Bank to work for a weakening of the pound to help boost the UK economy.

Troubled exporters

The Item Club said the current economic conditions of a strong pound but low interest rates had seen exporters suffer despite a boom in High Street spending.

The Item Club warns that a false sense of security among borrowers may prolong the pain of any future financial crisis.

Mr Townend said a lower exchange rate between the pound and the euro would also make it easier for the UK to adopt the euro.

"Virtually everyone suggests that a lower exchange rate against the euro would be required for entry - indeed it is one of those very few things that almost all economists appear to agree on," he said.

Rising euro

But rather than a fall in the value of sterling, Mr Townend would prefer to see a rise in the value of the euro, leaving the pound/dollar exchange rate unchanged.

In a recent BBC interview, the Bank's governor, Sir Edward George, described the euro as "undervalued".

Many observers say that either the pound must fall or the euro must rise about 10% to enable the UK to join the eurozone at a competitive exchange rate, although economists surveyed by the Financial Times questioned that premise.

The government aims to complete its five economic tests by June 2003.

Only then will it decide whether or not to call a referendum on eurozone entry.