Sunday 06 September 1998
Six interest rate increases in the UK since May, and less demand from Asia and emerging markets, will probably convince the Bank of England to lower its benchmark rate from 7.50 per cent this year or early next year. That would mean a lower money-market return on sterling.
"High rates are weakening the UK economy," said Denis Gould, who helps to oversee about pounds 40bn at Axa Sun Life Investment Management. "Rates are going to come down, but they aren't going to come down fast. That will gradually weaken sterling" to 2.75 German marks in 12 to 18 months.
On Friday, the pound was at 2.9037 marks, little changed from 2.9009 late on Thursday in London. It fell to $1.6745, from $1.6771.
The Bank of England's monetary policy committee meets on Wednesday and Thursday for its monthly rate-setting session. All 20 economists in a Bloomberg News poll expect the committee to keep the benchmark rate unchanged.
Eleven of the 20 said they expect a quarter-point rate cut in the first quarter of next year, and three forecast a cut before the end of this year, as the UK economy slows. Lower rates tend to undermine a currency by reducing the money-market return on deposits.
"We've got a sharp and deepening economic slowdown," said Nick Parsons, a currency strategist at Paribas Capital Markets. He expects the pound to fall as low as $1.64 and 2.88 marks this week. "The UK sends a higher proportion of its exports to Asia, compared with continental Europe, and we're suffering from a withdrawal of foreign investment."
Economic reports this week could provide further evidence that the economy is slowing. Economists polled by Bloomberg News expect manufacturing production to have fallen by 0.2 per cent in July from June, giving a decline of 1.1 per cent over 12 months. That report is due on Tuesday.
On Thursday, the Confederation of British Industry will publish its monthly trade survey, which will probably give further evidence that the pound's 24 per cent advance over the past two years is hurting UK manufacturers by making their goods more expensive overseas and competing imports less expensive.
The dollar was little changed against the yen on Friday, as US stocks failed to stage a convincing rebound and amid waning prospects that the Federal Reserve will lower interest rates to calm global markets.
"The fact that stocks can't sustain a rally and Latin America concerns persist make me concerned about the dollar," said John Rothfield, an international economist at NationsBanc in Chicago. "We don't think the current environment is a time to be buying dollars." He sees the currency falling as low as 130 yen and 1.70 marks next week.
Last week, the dollar fell 5.3 per cent against the yen and 1.5 per cent against the mark. Much of that decline was driven by speculation that the Fed would cut rates.
The US currency began to give up gains after the Labor Department said that the US economy had added a robust 365,000 jobs last month, as expected, giving the Federal Reserve less reason to cut rates.
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Weather bomb in pictures: Storms cuts power for tens of thousands – and snow is on the way
Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
Russell Brand was rendered speechless on Question Time by this man
Fury at Airbus after it hints the super-jumbo may be mothballed
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Shock poll shows voters believe Ukip is to the left of the Tories
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Germany sees 'visible rise' in support for far-right extremism in response to perceived 'Islamisation' of the West
iJobs Money & Business
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...
£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...