By Alen Mattich
LONDON: There’s a notorious English football chant, “no one likes us, and we don’t care.”
Well, on Wednesday, Bank of England governor Mervyn King and fanatical Aston Villa supporter (an English football club) offered up a variation: everybody hates sterling but the Monetary Policy Committee doesn’t care.
Sterling has, not to put too fine a point on it, been tanking.
Since the start of October, it has fallen 11% against the euro, 16% against the dollar, and 22% against the yen.
On a trade-weighted basis it is down 11% on the past month alone and down 17% from the start of the year. Since its multi-year high hit in January 2007, the pound has now lost 24%.
Those figures compare badly with the sterling crisis of 1992, when the currency was forced out of Europe’s Exchange Rate Mechanism. Then, sterling lost 13% in a month and ultimately dropped by as much as 19% by the following February. It’s worth remembering that sterling’s crisis then happened when it was trading not far off multi-year highs – in early September 1992 it was just 3.7% from a peak hit in August 1990.
Clearly sterling has yet again been hit by something of a crisis. And, having long been overvalued, it is now starting to look pretty cheap. The hedge fund blogger Macro Man notes sterling has more or less hit the equivalent of its mid-1990s lows against the Deutsche Mark.
And on a purchasing power parity basis, judging by how far sterling has fallen even since Australia’s Commonwealth Bank last compiled its iPod index at the end of October, the pound is looking good value against most emerging markets, all of Europe and isn’t far off the US.
Even so, fundamentals still bode ill for the pound. The UK is a debtor nation and needs to fund a current account deficit running at 3.6% of GDP this year and forecast at 3.4% next, according to the IMF.
A falling pound won’t shrink that gap quickly because of the UK economy’s heavy weighting towards a shrinking financial services sector and relatively small manufacturing sector. Unless the export sector manages to grow quickly – unlikely during a global recession – a collapse in domestic consumption will have to be the major route towards a balanced current account.
Property, which during recent years has been a big attraction for foreign investors, is plummeting in value, down around 15% on the year and, if anything, the pace of the falls are accelerating.
The government’s budget deficit, projected at around 3.5% of GDP this year is also expected to grow rapidly as the economy sinks into what many economists anticipate will be the deepest recession in decades.
The Bank of England is sanguine about sterling’s freefall – the pound barely merited a mention at the launch of the Bank’s latest Inflation Quarterly earlier this week – because even though consumer price inflation is running at over 5% on the year, it’s more worried about deflation.
That collapse in domestic demand, coupled with a dramatic slide in global commodity prices has led the Bank to forecast a significant risk goods and services prices will start falling sometime over the next couple of years.
A weak and falling pound adds to the monetary stimulus the Bank is already thrown itself into with its recent 150 basis point rate cut and promises of more to come.
As a bonus, any inflation the Bank manages to generate will eat away at the enormous debt burden carried by British households, who are some of the most indebted people anywhere. Ever.
The risk is that foreign investors grow to hate the pound and British assets so much that they refuse to buy into the massive supply of UK government debt coming onstream over the coming year, forcing long dated gilt yields to rocket.
And that will only make an already miserable economic environment even more depressing. – Dow Jones Newswires |
