Dollar and Pound Parity at Zero Interest Rate?
What a difference a year makes. A year ago we were happily skipping over to the US, buying up whatever we could to take advantage of a 2:1 exchange rate on the dollar. Then.. Armaggedon..
The pound has slumped to (as of writing) 1.47 Pounds to the Dollar and by all accounts it is not going to get better any time soon with the possibility of zero interest rates in the UK.
Former UK policy maker Willem Buiter said that the only thing stopping the Bank of England from cutting interest rates to zero on Thursday is a fear that it will turn sterling’s recent weakness into a “rout”.
Professor Buiter, a founding member of the Bank’s Monetary Policy Committee, told the Daily Telegraph: “I expect rates to be cut to zero before long, the reason why this will not be done in one go but in two to three is because they’ll be worried about what it would do to the pound.”
Last month he called on the MPC’s to slash interest rates by 1.5 percentage points to 3pc, a day before it made the shock decision to do so.
He is predicting another 1.5 point cut on Thursday to 1.5pc, arguing that the pound’s current level against the dollar would not yet be considered a sterling crisis.
“When you get to $1.30, you are no longer talking about a welcome adjustment and competitive advantage, it’s a rout,” he said after giving a speech at the Council of Mortgage Lenders annual conference in London earlier in the day.
He expects further interest rate cut will bring the bank rate down to zero - a first for the UK - in January or February.
The pound has fallen by 25pc against the dollar this year, and continued its decline today. Yesterday the pound dropped by the most in one day since Black Wednesday, when measured against a basket of major currencies.
Charles Bean, the Bank’s Deputy Governor for Monetary Policy, has stated previously that the depreciation of the pound should provide a welcome boost to exports, giving the UK a competitive advantage.
My father is visting with us at the moment. He used to work in the oil sector and was paid in Dollars. He remembers a time when the pound was close to parity and was very happy about it, problem was the UK was racked with massive unemployment… Doesn’t bode well..
Trading the currencies is a franetic pursuit these days but there must have been a lot of money made over the last year with the wild swings we have seen. The prospect of zero interest rates will be a relief for homeowners, but will these rates get passed on… unlikley.
Also, low interest rates are what got us into this mess in the first place, low cost of leverage fueled the boom and is now being looked at as a solution to the problem. The problem that is being forseen, however, is an economic downturn of Japanese proportions. After their crisis low interest rates and loose fiscal poliy caused what has become known as ‘the lost decade’ in Japan, where fiscal policy caused a decade long downturn for the country. Lets hope the slide of the Pound re-ignites exports and does some good, rather than plunge us into the abyss.
