The pound slumps to a 30-year low
As fears grow of rates cut to 0pc . . .
STERLING has fallen to its lowest level against the dollar for more than three decades as investors bet that the Bank of England will cut interest rates towards zero.
On another day of drama on financial markets, the pound fell to as low as $1.3001, a level not seen since 1985 when Margaret Thatcher was Prime Minister and Ronald Reagan was in the White House.
Sterling also touched €1.17 against the euro for the first time since late 2013 as analysts described the UK currency as ‘the whipping boy of Brexit’.
But Bank of England governor Mark Carney said the fall in the value of the pound – it is down more than 13pc against the dollar since the vote to leave the European Union – would boost exporters. He also said the fall in Government borrowing costs – with the tenyear gilt yield at a record low of 0.77pc – had helped push down corporate loan rates.
‘Sterling’s sharp depreciation should, given foreign demand, provide support to UK exporters, and the sharp fall in gilt yields has meant that all-in corporate borrowing costs actually fell modestly over the course of last week,’ he said at the launch of the Bank’s Financial Stability Report.
Investors are now betting that the Bank will cut interest rates again next week, having frozen them at 0.5pc since March 2009 when Britain was in the depths of the Great Recession. Another rate cut, to 0.25pc, would be a boost for millions of borrowers but a further setback for savers who have lost out since the financial crisis.
The Bank could also restart its money printing programme having already pumped £375bn of emergency funds into the economy through quantitative easing.
The central bank is under pressure to stop the uncertainty generated by Brexit turning into a full-blown economic slowdown or recession. But the prospect of lower interest rates and more QE – possibly as soon as next week when the monetary policy committee announces the outcome of its next meeting – has taken its toll on the pound. Harry Adams, managing director of currency firm Argentex, said: ‘The pound has been the whipping boy of Brexit as investors believe that the Bank of England will announce interest rate cuts and/or further quantitative easing on July 14.’
Carney warned that the UK ‘has entered a period of uncertainty and significant economic adjustment’.
He said: ‘The efforts of the Bank of England will not be able fully and immediately to offset the market and economic volatility that can be expected while this adjustment proceeds.’
A report by research group Markit estimated that the economy grew by just 0.2pc between April and June as the services sector slowed and the construction industry slammed into reverse. That marks a significant slowdown from growth of 0.7pc in the final three months of last year and 0.4pc in the first quarter of this year.
It is also the slowest rate of growth since late 2012.
‘A further slowing, and possible contraction, looks highly likely in the coming months as a result of the uncertainty created by the EU referendum,’ said Chris Williamson, chief economist at Markit.
The euro has also come under pressure against other currencies around the world following Britain’s vote to leave the EU as worries about the creaking eurozone banking system as well as its moribund economy take their toll.
Fawad Razaqzada, an analyst at currency specialist Forex, said: ‘The next domino to fall could be the euro. If Brexit concerns were to rise further, it could impact the euro.’
David Tinsley, UK economist at UBS, said the Bank might cut rates to 0pc no later than February. He added: ‘The immediate consequence is economic uncertainty – especially as the future of grading relationships between the UK and the EU is expected to remain unclear for some time.’