by Peter Warburton, PhD, Lignet

In the past four months, the relative tranquility of the British pound has been shattered. The pound has fallen 6 percent against the U.S. dollar, 7 percent against the euro and 6 percent when measured against a basket of leading currencies. During this time, there has been bad news on the UK balance of payments, on the government’s progress in cutting the fiscal deficit and on the overall performance of the economy. As a result, Moody’s downgraded UK government debt from AAA to AA1 on February 22. The new governor of the Bank of England may be able to steady the ship once he starts work in July, but the fundamental problems of a broken banking system, a lackluster economy and a susceptibility to inflation will remain.

In addition to the sequence of bad news, there is also plenty of uncertainty surrounding the pound. With the eurozone debt and banking crisis in remission, the UK is no longer the beneficiary of hot money inflows from Europe. A new governor of the Bank of England has been appointed, but will not take up his post until July. This interval has fostered speculation that the governor, Mark Carney, will be given a new and more flexible inflation mandate, which is likely to tip the real returns to pound deposits even lower. A weaker currency can only offer partial and temporary relief to an ailing economy, but it can still play an important part in rebuilding export profitability and confidence. There is no time to lose.

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