Weak sterling may not curb recession
The Bank of England says a weaker pound will help take the sting out of the economic slowdown, but euro zone demand for cheaper British goods may not take up the slack if the bloc's own economy proves too anaemic.
Pound hits 2-month high against struggling dollarThen interest rates might need to fall more than markets expect to shore up an economy edging closer to the first recession since that of the early 1990s when hundreds of thousands lost their jobs and homes.
Last August, one euro bought 68 pence. Now, it buys about 79 pence - a 16 percent rise in the value of euro, the currency of Britain's biggest trading partner.
On a trade-weighted basis, sterling is down about 12 percent on a year ago.
That, says the central bank, should help exports by boosting the purchasing power of other currencies and, in turn, supporting growth in Britain even as domestic demand slumps.
But analysts argue a sharpening global economic downturn means there may be less lasting benefit from the weaker pound than policymakers are banking on.
"The recent weakening in the outlook for the eurozone economy - the destination for around half of the UK's exports - suggests that there is a risk that activity in the UK will be even weaker than the Bank of England expects," said Paul Dales, UK economist at researchers Capital Economics.
ALREADY SLOWING
Britain's economy has already slowed markedly in the last year, down from 0.8 percent growth on the quarter in the second quarter of 2007 to 0.2 percent in the same period this year with analysts expecting a downward revision to 0.1 percent.
The BoE's latest inflation forecasts boosted expectations for lower interest rates, showing inflation falling below the 2 percent target in two years' time if rates stay at 5 percent.
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