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Pound falls to five-year low as Bank plans to cut rates again
Jonathan Prynn and Hugo Duncan22 Oct 2008
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THE looming recession sent the pound crashing to its lowest level in more than five years today.
It dropped more than seven cents to as low as $1.620 overnight, its weakest point since September 2003, after Bank of England Governor Mervyn King warned last night that the British economy is entering its first recession for 16 years. By lunchtime it stood at $1.6344, down 6.36 cents.
The Bank is expected to cut rates again, probably by another half point, when it meets again in two weeks. Interest rates were cut to 4.5 per cent this month.
Investors are piling out of sterling because they fear British interest rates will be cut dramatically in the coming months and over concerns that the British economy is in worse shape than previously thought.
The collapse in the value of the pound will make holidays to America and destinations with currencies linked to the dollar such as the Caribbean much more expensive. A spokesman for the Association of British Travel Agents said: "Travel to America is very sensitive to currency fluctuations. This time last year the rate was over two dollars and everyone was saying 'let's do our Christmas shopping in New York'.
"Well, the reverse is true this year. The good news is that as the number of bookings go down you will see airlines reduce their fares." But the weaker pound is likely to be good for tourism in London with more high-spending Americans coming. It will also be welcomed by British exporters as it makes it easier to sell their goods abroad.
The pound had been above $2 for much of last year and early this year, peaking at around $2.10 a year ago. It was also weaker against the euro today, falling almost a penny to 78.64p
In the City the FTSE-100 was down 145.91 points at 4083.82 at lunchtime. There was more bad news for the economy when the Bank of England published the minutes of its emergency meeting this month when the base rate was cut.
The minutes reveal that the outlook for the British economy has " deteriorated substantially" over the past month. City economists said they expected sterling to fall further in the coming weeks.
Hans-Guenter Redeker, of BNP Paribas in London, said the prospect of aggressive interest rate cuts to bolster UK growth meant the pound will fall to $1.55 by the beginning of 2010.
George Buckley, of Deutsche Bank, said the fall in the pound was no surprise: "The economy is highly linked to what is happening in the housing market and the banking sector."
Simon Hayes of Barclays Capital said Mr King's remarks "were pre-empting an explicit forecast of outright recession in the November inflation report in a few weeks."
Reader views (5)
With the value of the pound going down nearly every day,it just proves what New Labour is doing to the economy. I wonder if they will end up devalueing the Pound?
- Stan White, leeds, 23/10/2008 08:14
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Surely we're not going to start the credit merry-go-round off again by way of low interest rates to appease the credit junkies and spend thrifts. We need to learn the lesson of living within our means. And besides why should the careful who have managed to restraint their expenditure and save subsidise the wasters and poor money managers by way of low interest rates to enable them to carry on as usual. Oh no Brown and his crew see the future in continuing encouraging those who have spent their pile and more besides to repeat their pattern of behaviour so we all can experience another bout of financial havoc.
- John, Leighton Buzzard, Beds, 22/10/2008 18:08
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Some of the retailers are doing themseleves a disservice with their promotions. I went into a suit shop that was advertising huge reductions. The problem was that the waist sizes available were 28" and below, and 48" and above. Yesterday I went to buy a book. The shop was doing a 3 for 2 promotion. As I wanted one book I did not feel like paying full price for it. If retailers want to boost sales they should do genuine reductions such as 15% across everything. Loss leaders are not the way forward in a recession!
- Michael, London, 22/10/2008 13:41
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What a surprise. People are realising that they cannot spend money they haven't got on things that they don't need!
- Bj, London, 22/10/2008 12:16
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What tends to be forgotten is that visits to ARGOS are either stress purchases(bust toasters/kettles) or desirable household items.
What is clearly happening is that people are doing without if something breaks/becomes obsolete and desirable items are on hold. Seems very sensible to me.
In any case ARGOS would be advised to watch out, there is plenty of cut-throat competition around.
- William Grierson, Kimpton, UK, 22/10/2008 11:59
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