Sterling has hit an 11-year low against a range of currencies and slumped to 80p against the euro for the first time as consumer confidence wanes against a weakening housing market and a downgrade to UK growth forecasts.
On the same day the International Monetary Fund cut its UK growth forecast for next year to 1.6 per cent, blaming the current credit crunch. Only last month, UK Chancellor Alistair Darling forecast growth for 2008 of 1.75-2.25 per cent and 2.25-2.75 per cent for 2009.
On Tuesday, the Halifax house price index reported that house prices fell by 2.5 percent in March from February, more than six times as much as analysts had forecast and the largest monthly decline since September 1992.
All this comes just just a week after the IMF said that UK house prices are overvalued by nearly 30 per cent.
As well as downgrading the UK’s growth forecast, the Financial Times reports that the IMF noted that the financial market crisis that emerged last August is:
the “largest financial shock since the Great Depression and said that the worlds developed economies will not recover from it quickly. Already, its spillover effects are being felt in most developed economies, particularly those in Europe and especially in the UK where financial institutions are exposed to the US.
Iceland seems to be one of the first countries to feel the full brunt of the economic turmoil engulfing the globe as a recent run on the krona has seen the country’s currency lose a third of its value.
Iceland has had to hike its interest rates to a whopping 15% to hold down inflation, currently running at nearly 7%. as according to the Sunday Herald:
financial institutions, working as a pack, start selling shares in Icelandic banks, in order to create a crisis from which they can benefit by selling their short positions (essentially bets that a company or a currency is going to collapse in value). In the past, the international financial “community” might not have bothered about a country that is a mere pimple on a map of the Arctic Circle. But nowadays, with the credit crisis, every billion counts.
The question is whether Sterling is next up for the speculators. It happened before in the 1990s when, as could soon again be the case, the UK economy was in recession and involved in a Gulf War.
The country was also in the European Exchange Rate Mechanism (ERM), until September 16th, 1992 that is. On that day, otherwise known as Black Wednesday, the then Conservative government had to withdraw the pound from the ERM, due to pressure by currency speculatorsmost notably George Soros.
Interestingly, Soros said 11 years ago that the UK should join the euro to safeguard the value of sterling.
According to Soros back then, something had to be done to stop the chaos of uncontrolled free markets ultimately bringing down the capitalist system. He said better international co-ordination was essential to protect national economies from the effects of crises in financial markets, pointing in particular to the benefits of being sheltered from the full force of any future bouts of turbulence that may sweep the currency markets in the future.
Could it be that Soros’ future has finally arrived?
Eds: Have added UK to the title of this post as it was meant to be UK-specific.