Archive for January 2011

Pound Suffers As UK Economy Contracts

January 26, 2011

The British pound suffered its worst performance in over a month on Tuesday as data revealed a shocking 0.5 percent contraction in the UK economy for the December quarter.

Sterling dropped over two cents to $1.5821against the US dollar and reached a ten week low against the euro at £0.8648.

After four quarters of growth, economists had forecast a rise in the UK’s gross domestic product of 0.6 percent and expected an immediate rate hike by the Bank of England in order to quash growing price pressures.

However, the loss in GDP of 0.5 percent has put any hopes of a rate rise on hold and fuelled fears of a double-dip recession.

Whilst the government has blamed the financial impact of the winter weather, many analysts fear that the fragile UK economy is unable cope with government spending cuts and austerity measures.

Maurice Pomery at Strategic Alpha told The Financial Times that the central bank now faces the complex issue of rising inflation and a shrinking economy.

“This is really bad news for both the government and the Bank of England as it continues to wrestle with stubbornly high inflation,” Mr Pomery said. “Sterling is set to fall further.”

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Euro and Pound rise as Eurozone fears eased

January 24, 2011

Both the Euro and British Pound had a positive close to the week on Friday after fears were eased over the Eurozone debt crisis.

Strong economic data from Germany and a weakening US dollar boosted the euro last week resulting in its best performance since 23 November when it climbed 1.6 percent to $1.3586 against the US dollar.

The sterling also gained as stronger than expected UK consumer price inflation data indicated likely rises in interest rates. Against the US dollar the pound rose 0.8 percent to a two month high of $1.5990.

Despite reports over recent weeks of a possible bail-out for Portugal and debt restructuring in Greece, investors seem to have to regained confidence that the debt crisis can be contained.

“The euro continues to find support, which appears to reflect the view that ultimately the eurozone will survive its crisis,” Jane Foley, analyst at Rabobank told The Financial Times.

“We are of the view that the euro will move higher against the dollar. The combination of loose fiscal policy and monetary policy in the US could push the euro towards $1.50.”

In addition to a weakened US dollar, it is believed that the euro is also being strengthened by increased buying by Asian central banks wishing to diversify their previously US dollar-based currency reserves.

Euro Strengthened By Eurozone Debt Reduction Measures

January 19, 2011

The euro has pushed higher in the market amid discussions over an increase to the eurozone rescue fund and plans for a tougher round of stress tests for European banks.

The euro gained more than a cent against the US dollar on Tuesday to reach a high of 1.34 whilst the pound, boosted by the prediction of an interest rate rise, reached 1.194 euros.

The European Commission and European Central Bank have called for an increase to the European Financial Stability Facility (EFSF) which can only contribute 250b to any future bail-out without risking its maximum triple A rating.

The EC and ECB fear that this would not be sufficient enough to rescue Spain which is thought to be next in line for a possible EU bailout.

However, Jen-Claude Juncker, chair of the EU ministerial meeting has denied that such an agreement has yet been made. He said only that, “The discussion was broad and will be narrowed in the next couple of weeks.”

Meanwhile, the currency market has also been strengthened by discussions in Brussels of a tough round of stress tests for European banks.

The tests, which serve to strengthen the banks’ financial standing, are widely seen as an important step in resolving the EU crisis.

Economists Warn Against Interest Rate Rise

January 17, 2011

The Bank of England is being urged to keep UK interest rates low despite pressure from the recent VAT increase, the BBC reported on Monday.

The Ernst & Young Item Club, influential economic forecasters, have warned that an increase on the current 0.5% base bank rate could have serious consequences on the UK’s economic recovery.

Peter Spencer, the Item Club’s chief economic adviser has urged the Bank of England to ‘hold its nerve,’ despite inflationary pressures.

“If the Bank has been pushed into a rate rise this year it will find itself with a depressed economy, a low rate of inflation below target, and of course having to cut interest rates,” Mr Spencer told the BBC, “That would seriously damage its credibility.”

It is thought that the Bank of England is under pressure from the government to raise rates in response to the recent VAT increase and rise in commodity prices.

Deloitte, the leading accountancy and consulting firm, also sided with the Item Club stating that too much fiscal tightening could result in a delayed economic recovery for the UK over the coming years.

Fears for UK as economic growth rate slows

January 12, 2011

Concerns over the UK’s economic recovery have been fuelled as new data released by the British Chambers of Commerce on Tuesday revealed a slowing in the country’s economic growth rate.
The BCC has reported that the economy slowed to a rate of 0.4-0.5 percent in the last quarter of 2010, down on the official growth rate for the July to September quarter of 0.7 percent.

Although manufacturing output and exports were strengthened last year, overall growth was stunted by a poor performance in the service sector.

Director General of the Chambers of Commerce, David Frost, said in an interview with the BBC:

“The manufacturing sector is being driven by exports, not least to the growth areas on the far side of the globe, but the service sector is suffering from a lack of confidence with consumer spending being reined in.”

It is feared that further losses in the service sector are to be seen as a result of the recent VAT increase and government deficit-cutting measures.

The BCC has urged the Bank of the England and the government to “act forcefully to support growth,” and to maintain low interest rates until the UK’s economic recovery is stabilised.

Mr Frost added, “We call on the government to take concerted action now to ensure recovery continues.”

Pressure grows for Portugal to seek financial support from EU.

January 10, 2011

Portugal is under increasing pressure to ask for financial help from the EU and International Monetary Fund according to a senior euro zone source.

According to Reuters, a senior source acknowledged on Sunday that preliminary discussions regarding a possible Portugal EU bail-out had been taking place since July.

In addition, the source suggested that the pressure on Portugal to accept financial aid is mounting and that the time has come for the Portuguese to accept help.

“France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later,” the senior source said, confirming that the Netherlands and Finland also shared a similar opinion.

In the weekend newspapers, the Portuguese press also seemed to be accepting the inevitable with an editorial report in ‘Publico’ claiming, “Only a miracle will save us from the IMF.”

However, a Portuguese government spokesperson has denied that Lisbon is being put under pressure to seek IMF and EU financial assistance by Paris and Berlin.

It is hoped by policymakers that bailing out Portugal would curb the EU debt crisis and prevent further financial mayhem in the Eurozone.

Both Greece and Ireland were forced to accept EU funding last year, despite both countries initially denying the extent of their debt.

Rent And Mortgage Payments Made With Credit Cards

January 6, 2011

More and more people are paying their rent or mortgages with money borrowed from credit cards. The charity Shelter surveyed 2,202 people and found that 6% of those people had uses money borrowed from a credit to pay the rent or mortgage. Shelter reflected that borrowing money from a credit card company to pay these sort of bills is the “worst possible course of action” for householders.

A spokesman for the Council of Mortgage Lenders (CML) said the vast majority of cases would relate to rent payments, as regular mortgage payments were deducted from bank accounts rather than from credit cards. “Some 11% have used a credit card to pay their bills at some point. Despite recent sensationalist news headlines, only 2% of mortgagors have ever paid their mortgage on a credit card, with half of these paying off the balance at the end of the month.”