The pound fell about 1 cent to $1.8552 versus the dollar Wednesday -- approaching a 2-year low -- as sentiment grew regarding the need for the central bank to cut rates to avoid a recession.
In its August 7 meeting minutes (pdf), during which it kept its benchmark interest rate at 5%, some members argued for a rate cut after private banks in the United Kingdom cut GDP forecasts, while others said a rate increase was needed to check inflation expectations.
U.K. slowdown mirrors U.S. slump
London-based economist Mark Chandler told BloggingStocks Wednesday the inflation pressures stemming from oil's rise are real, but so is Britain's economic slowdown.
"Based on data I've reviewed, we're patterning America, only about a quarter late. GDP in Q2 slowed to 0.2% this year from 0.8% in Q2 last year, which is about the same deceleration rate as Q2 in America," Chandler said. "Almost certainly GDP will be negative for Q3, and I think the currency markets sense this and see a Bank of England rate cut or two up ahead."
Meanwhile, inflation "will likely remain above the Bank of England's 2% ceiling, and give ammunition to the hawks," but the preponderance of evidence favors at least one rate cut, he said.
"The last thing the free markets need is both the U.K. and America in a recession at the same time," Chandler said. "It would slow the global economy considerably."
Further, Chandler said a weaker pound would help U.K. exports slightly -- it makes them less expensive -- but that advantage would likely be offset by reduced export activity as a result of fewer orders, particularly if the European Union's economy also continues to slow. The EU accounts for about 40% of the U.K.'s exports, he said.
Economic Analysis: Given the dollar's rise versus the British pound, the markets appear to be pricing-in at least one interest rate cut by the Bank of England. Moreover, given the scope of the regional economic slowdown, an interest rate cut by the European Central Bank would help, as well, by facilitating commerce in three major economies.
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