Pound Goes Down: Deflation Fears
The pound has tumbled to a five-year low against the dollar as fears of an imminent UK recession mount.
Sterling fell to just above 1.62 US dollars at one point – the lowest since September 2003.
Bank of England Governor Mervyn King has acknowledged the likelihood of a recession for the first time and the prospect of deep rate cuts ahead have dragged the pound lower.
Dr King’s announcement comes none too soon for some experts who believe deflation is the greatest threat to the UK economy and fear Britain is at risk of repeating Japan’s 1990s experience of minimal growth and falling asset prices.
Once prices start falling the economy will keep contracting, trapped in a downward spiral, which makes it extremely difficult for both governments and central banks to stimulate economic activity.
Nick Parsons of nabCapital said: “Dr King has signalled that the Bank of England is poised to slash the base rate of interest to see off the threat of deflation.
“He knows that there is only a limited opportunity to give the economy a much-needed boost.”
The Sky News money panel expert added: “There’s no point using a defibrillator once the patient is dead.”
Another member of the money panel said sterling was already “weakening
Dr Gerard Lyons, chief economist at Standard Chartered said: “In this environment the market is keen to spot trends and push them further.
He added: “Given this, Mervyn King’s message added fuel to the fire.
“This is a green light for rates to fall and with misplaced inflation fears replaced by the likelihood of low inflation, lower rates and a falling pound are not an issue.”
Meanwhile, US Federal Reserve chairman Ben Bernanke’s support for a new stimulus package for the world’s largest economy this week has helped invigorate the dollar.
Traders in London said major investors were selling the pound heavily. The dollar also gained strength against the euro.
CMC Markets analyst James Hughes said: “Investors continue to flock to the dollar as speculation mounts that central banks elsewhere will continue with
aggressive rate cuts in an attempt to stimulate growth in the near term.
“As a result we have seen some spectacular declines by some major currencies against the dollar in the last 24 hours.”
Original article: Pound Goes Down: Deflation Fears From skynews
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