Sterling sinks to weakest showing against the euro
Dec 11 2008 by Iain Laing, The Journal
THE pound hit a record low against the euro yesterday as a top think-tank forecast a bigger than expected drop in economic output as the UK heads into recession.
At its low point, one pound bought just under 1.14 – its weakest showing against the single currency and a blow for holidaymakers planning festive trips.
It comes as growing concerns over a lengthy recession heighten the prospects of UK interest rates falling to all-time lows below 2% next year, putting pressure on the pound.
The National Institute of Economic and Social Research think-tank said yesterday that Britain’s economy shrank by 1% in the three months to November. This fall followed after a 0.8% drop in the three months to the end of October, said the think tank.
Official data showed that the economy shrank 0.5% from July to September. But it will not be until January that the Office for National Statistics reports on the final quarter’s GDP.
If it reports a decline for the three months to December, then the UK will be in officially in recession under the generally accepted definition of two consecutive quarters of decline.
Martin Weale, NIESR director, said the Government would need to put more equity into the banking system so that it was better capitalised and he said he would be unsurprised if output continued to fall until 2010.
The organisation said: “The Government faces the real risk that, despite the [stimulus] measures it took in last month’s Budget, output will fall more sharply than it expected to the end of next year,” it said.
“The main problem that it needs to address very urgently is the availability of bank credit, and further interest rate reductions are unlikely to have much effect.”
The Organisation for Economic Co-operation and Development warned last week that the UK faces a “severe” economic downturn in 2009, predicting that economic output in the UK will fall by 1.1% next year, more than any other major G7 country.
Rates in the eurozone remain higher at 2.5%, despite a 0.75% cut from the European Central Bank last week. The pound has sunk nearly 20% against the euro in the past year as UK interest rates fell from a peak of 5.75% to 2%. The weaker currency should be a boost to UK exporters but the economic woes of major export markets such as the US and Europe is hitting demand.
Mark O’Sullivan, director of trading at Currencies Direct, expects to see a “series of record lows” for the pound against the euro in the run-up to Christmas, with sterling possibly falling as low as 1.10. The pound also hit a six-and-a-half-year low against the dollar last week, falling below 1.45 for the first time since April 2002. Sterling remained below the 1.50 mark yesterday, trading at about $1.48.
