The British pound fell to a record low against the euro on Monday, flirting with one pound per euro as two gloomy economic forecasts stoked expectations that the Bank of England will make further interest rate cuts next year.
The pound fell to just euro1.022 Monday, its lowest since the euro's 1999 launch, after reports predicting unemployment will rise and house prices will fall in 2009. Those downbeat reports led currency traders to bet that the Bank of England will cut interest rates further early next year.
The rapid decline in the value of the pound, which has now fallen by around 13 per cent against the common European currency this month alone, is making life tougher for British tourists – many of whom are already getting just one euro for each pound.
For instance, the Travelex foreign exchange company was on Monday selling euro1 for exactly 1 pound at its online store, where tourists can order foreign currencies for pickup in the company's outlets at tourist locations like airports.
The pound is being driven down by expectations that the Bank of England will cut interest rates to stimulate the economy, which shrank by 0.6 per cent in the third quarter, and looks like it is heading into a serious recession.
Interest rate cuts can weaken demand for a country's currency by reducing the yield on interest-bearing investments.
On Monday, Hometrack housing researchers said house prices fell by nearly 9 per cent in 2008 and predicted that they would fall further next year. At the same time, the Chartered Institute of Personnel and Development predicted that employers will lay off at least 600,000 people in Britain next year, making 2009 the worst year for job cuts since 1991.
"We all know that the economy is full of bad news for 2009 – jobs are going to be scarce, GDP is going to fall, and inflation could drop below 1 per cent," said James Hughes, a currency analyst with CMC Markets. "And so, we're expecting an interest-rate cut of 50 to 100 basis points in January or February." In financial terminology 100 basis points is a one percentage point.
The pound has fallen by more than 25 per cent against the euro this year as the Bank of England has lowered interest rates from a peak of 5.75 per cent to a more than 50-year low of 2 per cent.
Interest rates in the euro zone remain higher at 2.5 per cent, despite a 0.75 per cent cut by the European Central Bank earlier this month.
The lower pound raises costs for Britons when they travel to the 15 countries that use the euro, and raises the price of imported goods.
Exporters, who usually benefit from a lower currency, are not getting much help from the pound's decline because the global economic slowdown is leading to weaker consumer demand in Britain's major export markets of the United States and Europe.
The pound was little changed against the U.S. dollar on Monday at $1.4598. At this time last year, 1 pound would buy more than $2.
