The UK Treasury and Bank of England may need to take "specific actions" to weaken sterling if Britain wishes to join the European single currency at a sensible rate, according to the International Monetary Fund.
The IMF also says ministers will have to interpret the five economic tests as to whether Britain is ready to join the euro loosely if the government does not want a long delay before entry. Most economists believe the British Prime Minister's administration will be guided mainly by political considerations in deciding on the timing of entry, with a referendum widely predicted for soon after the next general election.
The IMF warns that Britain's economy is out of step with the rest of the euro zone. It backs efforts by the government to focus its monetary and fiscal policy on medium-term objectives such as inflation and sound public finances.
But it warns that these objectives cannot be relied upon to bring Britain's economic cycle into line with that of the euro zone or to move sterling to a reasonable entry level.
The IMF's study was prepared for its latest in-depth review of the UK economy. It is likely to put pressure on Chancellor of the Exchequer Mr Gordon Brown to clarify how he intends to steer economic policy from the current focus on domestic inflation targets towards adoption of the single currency.
Many of Britain's manufacturing companies have called for a reduction in sterling's value, which has been hitting their export markets. Conversely, its strength has benefited Irish companies competing in the UK market. It has also helped Irish firms to remain competitive against their UK counterparts in the home market.
