Sterling is 'finished' says expert as £ slides

Published on Tuesday 20 January 2009 21:19

THE pound slumped to a seven and a half year low against the dollar yesterday as investors frightened by the unknown scale of the bank bailout took their money out of Britain.

Sterling was down about 3.5 per cent against the US dollar and on track to post its biggest drop since 1992, after the Royal Bank of Scotland on Monday announced the biggest losses in UK corporate history.

The slide in sterling came as Jim Rogers, a currency strategist who correctly predicted the 1999 commodities boom, warned investors to pull their money out of the UK.

"I would urge you to sell any sterling you might have," he said on Bloomberg Television. "It's finished. I hate to say it, but I would not put any money in the UK."

Antje Praefcke, a currency strategist at Commerzbank, agreed: "Worries about the banking crisis are leading to more risk aversion.

"The market isn't convinced, for the moment at least, that there'll be a light at the end of the tunnel."

Neil Mackinnon, the chief economist at ECU group, warned that if the government did not drop its policy of "benign neglect" over the sterling, then the UK would go down the route of a "banana republic".

But Lord Peston of Mile End, a Labour peer and economist, predicted that sterling would rise during 2009 and told The Scotsman it was "undervalued".

After a finance ministers' meeting in Brussels, Alistair Darling, the Chancellor, was vague about the government's strategy. He said: "We have always made it clear that we will do everything we can to support our economy and to support people and to support businesses."

UK 'may soon be staring deflation in face'

THE spectre of deflation loomed yesterday after the biggest drop in inflation for 17 years.

Official statistics showed the consumer prices index (CPI) – the government's favoured measure – fell from 4.1 per cent to 3.1 per cent between November and December, a size of drop last seen in the 1992 recession.

The reduction in VAT, from 17.5 per cent to 15 per cent, made the biggest contribution to falling prices. Other factors included cheaper petrol and diesel, and the discounting of clothing and shoes as retailers offered pre-Christmas bargains. The government target for CPI is 2 per cent.

But with the retail prices index (RPI), which includes mortgage repayments, sliding from 3 per cent to 0.9 per cent – in the wake of the 1.5-point cut in interest rates – experts warned deflation was just around the corner.

Manufacturers fear deflation as it gives them little incentive to invest in new products as sale prices are falling.

Graeme Leach, the chief economist at the Institute of Directors, said: "Inflation is most definitely yesterday's story.

"Unless the huge stimulus from the VAT reduction, record low interest rates, a falling pound and the collapse in the oil price begin to take effect soon, the UK will be staring deflation in the face."

David Kern, of British Chambers of Commerce, said: "This fall in inflation was less than the markets expected. But there is still a distinct risk of deflation later in 2009, particularly on the RPI measure."

ROSS LYDALL

Hundreds of jobs lost

MORE than 1,000 redundancies were announced yesterday, amid fears today's latest unemployment figures will see the total break two million.

The food firm Vion laid off 830 staff, including 150 at Cambuslang in Glasgow, following the loss of contracts to supply Marks & Spencer.

The haulier Eddie Stobart is to close two depots with the loss of 180 jobs, including about 100 at its base in Larkhall, Lanarkshire.

The luxury clothes retailer Burberry is shed 290 jobs, including 170 at its sewing plant in Rotherham, Yorkshire.

Meanwhile, there are fears of further redundancies at Jaguar Land Rover. It announced 450 job losses last week and there is mounting speculation up to 1,300 jobs could be lost because of the slump in car sales.