Analysts divided over weaker Sterling

Friday, 9 January, 1998

By Johann Tasker

STERLING took a tumble yesterday – but analysts are divided over whether the Pound has at last started to weaken.

The Pound closed down more than 3 pfennigs to DM 2.9349, after officials at the Bank of Englands monthly Monetary Policy Committee meeting left interest rates unchanged.

As widely predicted, the base rate remains at 7.25%. Many economists forecast interest rates this year are now unlikely to exceed 7.5%, despite stronger than expected retail sales during December.

A slow-down in the UK economy means Sterling should weaken to DM 2.65-2.70 by the middle of this year, according to NatWest Groups chief economist, David Kern.

“Further monetary tightening is no longer inevitable,” he said.

But Sterling could easily go back up again, warned Francis Mordaunt, head of research with farm consultants, Andersons.

Lower interest rates are not a particular reason for Sterling to weaken, he said: “It depends on how its value compares with other currencies.”

If the money markets get the jitters before the start of European Monetary Union, the UK could become a “safe haven” for foreign investors, Mr Mordaunt said. Such a scenario could see Sterling climb again.

“That could really crucify farmers,” Mr Mordaunt added.

But other experts remain cautiously optimistic that interest rates will remain low and Sterling will fall.

A weakening of the Pound against other European currencies could help boost farm exports because most UK agricultural trade overseas is with EU countries, said Norman Coward, head of Midland Agriculture, London.

“There are enough signals to indicate that further dampening of the economy is unnecessary,” he said. “If that is so, its good news for farmers.”

Simon Bennett of Deloitte & Touche Agriculture said a weaker pound would be good news for everyone.

“Its been a difficult year for farmers and all enterprises have suffered because of Sterlings strength,” he said. “Any weakening of the Pound will come as a welcome relief.”

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