Comments: Sterling could be a sitting duck

Hi David,

So if sterling falls the costs of imports goes up, companies realise they can sell their products for more outside of this country (hence, exports rise), less goods are sold in this country so the price increase... all in all, inflation rises.

So what will happen to interest rates? Won't the rise to combat this? Or will politics get in the way again?

Posted by JZ at November 20, 2005 02:18 PM

David

Please could you explain your assupmtion on sub $40 oil? Why, by when, and for how long?

My gut instinct is that you are perhaps correct, particularly in the medium term. But it is very much a lone view, and my internet research only seems to turn up articles on peak oil, the number of cars in China, the US still expanding and shrugging off a massive trade deficit - the list goes on.

A comment on your article generally - normally you offer some sort of a view on how you expect things to pan out, albeit with different scenarios. This time though you seem to have commented on a very odd situation, but left it hanging with "If the pound gets up to some of its old tricks it will be provide another reason why things might not be very nice at all."

Are you suggesting that we might be on the verge of the major imbalances in the world economy and the asset/debt "bubble" coming together in an unpredictable collision that will leave us in uncharted waters? Or do you believe that this is just another sequence of events that can if handled correctly be ridden out again by King and his global oppos continuing his "nice" era.

I try hard to understand what is going on, but right now I have the distinct impression that I am not alone (including in the upper echelons) in watching in bemusement as many of the old reference points are cast aside.

No doubt when we look back with the benefit of hindsight it will all make sense!

Regards

David

Posted by David Brown at November 20, 2005 05:22 PM

On sterling, in an earlier incarnation I used to be a currency forecaster and I know how hard it is. As I say in the piece, if interest-rate differentials were all that determined currency values, making money would be easy. Even on that basis, it could be argued that sterling's loss of interest rate support is already in the price. The main surprise coming through at present is stronger growth in Europe, which should argue for a lower sterling level against the euro. The big unknown is whether the dollar's strength persists or whether the US current account deficit will hit it.

On interest rates, a significant sterling fall would indeed get in the way of further cuts and force rates higher.

On oil, I expect sub-$40 prices within the next 12-18 months, possibly sooner. Demand is increasing, from China and elsewhere, and so is supply. I accept that there has been an increase in oil's long-run price from the mid-$20s to the mid-$30s, a big shift. I don't accept there has been a shift from the mid-$20s to a sustainable $60, $80 or $100 a barrel.

Posted by David Smith at November 20, 2005 06:06 PM

David,

It seems that the Sterling is currently in problems. This will obviously mean the UK imports inflation from outside countres. Also, this makes the energy price problems worse for UK. Is it not now time you stop being in peoples pockets and tell people the truth. Interest Rates in UK are going to have to go up as is the global trend. Please exploin your thoughts to me.

Thanks

Posted by Jean Pierre Bulle at November 22, 2005 04:11 PM

Everybody believes in conspiracy theories - must be something to do with the internet. I write what I believe to be right, not for anybody's convenience. A sterling collapse, if it happened, would force interest rates higher, that goes without saying. A gradual fall, at a time of slow growth (and therefore spare capacity) might not. Indeed the Bank of England might welcome it as a contribution to rebalancing the economy.

In the absence of that, why don't UK rates have to rise when America, Europe and possibly Japan are hiking? Because the UK had rate rises, from 3.5% to 4.75%, when they were stuck at 1%, 2% and 0% respectively. The Bank gave the clearest of signals last week that it does not see the need for rate hikes.

Posted by David Smith at November 22, 2005 04:33 PM

David - I well remember the last period of raised rates in 1989 - the recession was blamed on Lawson pegging to the ERM and running an expansiory policy - but something just doesn't make sense in this picture.
How do you explain the recession being worldwide from 1989-1992?

I believe that the US dollar rose as higher interest rates kicked in, and other currencies with strong dollar trading links - like the pound - dropped sharply against it, meaning the raised dollar imports quickly fed through to cost push inflation.

I feel strongly that this picture is behind the globalised nature of the recession in 1990-1992 and the dollar will again surprise on the upside.

Posted by Martin Hutchinson at December 2, 2005 12:06 AM

I dont see an abatement in china's economic growth, a raging train at the moment which will cause a break much slowly, but even if it slows down because of currency movements, there are other asean economies to take its place, notably India. When will oil price acheive sub-40 levels?

Posted by Hitesh Damani at May 5, 2006 01:47 PM

But, I don't really understand why the UK holds a stong sterling.Because it can limit UK's export.
Can you give me a more convincing evidence?
p/s give sources of statistic/data.

Posted by Trang at April 6, 2008 03:52 PM