Comment: Sterling's collapse threatens to undermine good start to 2013

Comment: Sterling's collapse threatens to undermine good start to 2013

A decent start to the year for bookings is at risk from the sudden fall in the value of the pound.

The UK market to Europe undoubtedly benefited from a weak euro last summer. This year may be different. Sterling fell sharply last week and appears set to fall further.

The pound began 2013 at €1.23 or $1.62 and has declined since about mid-January before heavier falls this month.

Sterling fell sharply in early February following publication of a Bank of England Inflation Report which acknowledged inflation would remain above a 2% target for two to three years.

That led the pound to a 15-month low of €1.15 in the middle of last week - a devaluation of about 10% on the €1.27 rate of last summer. Against the dollar, sterling was down to $1.55, its lowest for seven months.

At that point, the Financial Times reported “hedge funds and investment managers dumping sterling”.

The FT blamed stagnating growth, the threat of a debt downgrade and concern inflation would weaken asset values. One currency analyst warned the pound was “at risk of large-scale devaluation”.

That was merely the beginning. Publication of the minutes of the most recent meeting of the Bank of England monetary policy committee on February 20 triggered a further fall.

The minutes showed Bank governor Mervyn King had been outvoted in his desire to pump more money into the economy through quantitative easing.

The pound fell lower against the euro as an RBS currency strategist declared of King’s policy: “It smacks of desperation.”

Another analyst, at Japanese Bank Nomura, noted: “This could be just the start of the sell off.” Then on Friday the UK lost its sovereign-debt triple-A rating from credit agency Moody’s.

Leave aside the fact that the financial crisis – and the issuance of top-rank ratings to sub-prime mortgages - suggested the views of rating agencies are largely worthless.

This was a profound blow to the Chancellor, the Tories and the Coalition, and to sterling. The pound was expected to come under fresh pressure today and in the days to come.

On Saturday, FT columnist John Authers pointed out a further 7% fall would return the pound to its low point of 2008 when it subsided 36% against the dollar to $1.35 and came close to parity with the euro. Authers argued: “It’s quite possible it will get there.”

Yet this would be welcome to substantial sections of business. FT economic commentator Martin Wolf greeted the news thus: “Sterling is falling. Hurrah! The economy calls for a further depreciation.”

Letting inflation go already appears to be the strategy of incoming Bank of England governor Mark Carney who will take over in July.

Of course, the ultimate price will be paid by consumers whose earnings don’t keep pace. This would matter less if prices had not already risen faster than incomes for the past four years.

King had no good news on this area, reporting the incomes squeeze would continue at least into 2015 and UK consumer demand would not return to its former level.

He argued: “There is no point trying to persuade people to spend in the way they were before the crisis hit.

“This is not simply a temporary downturn that will recover to its previous long-term trend...The path on which private demand was going was unsustainable...total domestic spending had to shift to a new lower level.”

The Bank governor blamed government policy for the latest CPI inflation figure of 2.7%, describing “the damage done to take-home pay” as “self-inflicted”. RPI is higher at 3.1%, against a rise in average earnings of 1.4%.

An Ipsos MORI poll hinted at the result, finding 68% of adults reported cutting back on spending. The combination of a devalued currency and devalued income could prove toxic for outbound demand.

Of course, we could expect the major travel groups to benefit from currency hedging which should leave summer prices unaffected.

And all-inclusive resorts should prove more attractive than ever, with prices set and bills paid in advance.

Perhaps the late-booking market will prove most vulnerable to a failing pound, as consumers who have held off buying hear returning holidaymakers tell of higher prices in resorts.

But by that time, a resurgence of the euro crisis might have salvaged the pound at least as far as its exchange rate to the euro and holidays to Europe are concerned.

Unfortunately, that simply would not be much of a salvation - a jump from frying pan to fire.

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