Sterling Struggles As Predicted Due To Weak GDP So Is Another Interest Rate Cut On the Cards?

The pound dropped as anticipated yesterday following some horrendous UK GDP figures that will probably have George Osborne sleeping fitfully for some time.  With the wet weather curbing spending and floods costing both insurance and delaying build projects it was no great surprise to see GDP much lower than forecast.  Added to the extra bank holiday from the Jubilee which will have cost the economy much like the Royal Wedding, and the fact that our biggest trade partner, Europe, is slowing, then it is still difficult to see how the UK will get itself back on track to achieve growth in the near term.

The Bank of England have already pumped billions into the system and kept interest rates at a record low in an effort to kick start the economy.  Whilst the debate rages as to whether this process is working (some say it has meant the recession is a lot better than it would have been without QE, others say it has been a total failure), it looks as though more QE will be on the cards in the not too distant future.  More worrying though for anyone holding sterling are the rumours the Bank of England may cut interest rates by another 0.25% before the first quarter of next year, a move which would no doubt weaken the pound.

Why would they do this with rates so low already you may ask?  Well it is all down to the current GBP EUR levels in my view.  Whilst the government and BofE cant officially try and weaken sterling to gain a competitive advantage against other EU states, the idea of an export led recovery by UK manufacturers is largely being killed off by the problems in Europe.  The decrease in European spending (our biggest market) and the cost of the pound going up against the Euro, has meant it is much more difficult for UK companies to export to the rest of Europe.  Whilst the pound remains very weak against a whole basket of currencies, I disagree with many of my colleagues that GBP EUR will continue to rise much more.  Europe will no doubt have huge amounts of obstacles to overcome, and the Euro will obviously remain under pressure.  However,  the euro crisis should not distract people from the fundamental weakness of the UK economy- if the economy is not growing then the whole deficit reduction targets upon which the government has based its strategy will be completely out of kilter.  I wouldn’t be surprised to see an interest rate cut in another attempt to stimulate growth with a desired byproduct being a halt to the pounds recent surge to an ever weakening euro.

The future of exchange rates for the pound will depend on whether the Bank of England takes on board the recent data and makes a move sooner rather than later.  If you are looking to buy Euros from sterling it may be prudent to secure something in case the markets begin to price in the possibility of a UK rate cut.  For any more information please feel free to e-mail Colm at [email protected] and I would be happy to help.