Sterling ……… …

………continues to weaken

There has been further weakening in the value of sterling. This can benefit investors utilising foreign currencies, i.e. those already invested as they should consider taking some of their additional profit, or if they are considering selling their assets in the next 12 months, then maybe now is the right time.

The remainder of this report is from http://news.bbc.co.uk/1/hi/business/8304028.stm

The Consumer Prices Index (CPI) dropped to an annual rate of 1.1% in September from 1.6% in August. Meanwhile, the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, fell, to -1.4% from -1.3%. The pound fell 0.5% against the euro to a six-month low of 1.0628 euros. It also fell to a five-month low against the dollar of $1.5730.

Frail

"This is bad news for the pound," said Duncan Higgins, senior analyst at Caxton FX. "The CPI figures will weigh heavily on the UK currency and will continue to discourage investment." Sterling has been under pressure in recent days - including from a report by the Centre for Economics and Business Research - which predicted that UK interest rates would remain at their historic low of 0.5% until 2011 and would stay below 2% until 2014. Figures last week showing that UK industrial output fell unexpectedly in August also cast doubt on the strength of the UK economy. Meanwhile the National Institute of Economic and Social Research has revised its estimate for GDP, forecasting that the economy did not grow in the June-to-September quarter. And the British Chambers of Commerce (BCC) has said that while business confidence was improving, the economy remained "frail".

Spare capacity

The Bank of England aims to maintain CPI inflation at 2% to keep both prices and the broader economy stable. If CPI falls below 1%, the governor of the Bank of England will have to write a letter of explanation to Chancellor Alistair Darling. The slide in inflation was greater than had been expected, but was largely attributed to the spike in energy prices seen a year ago, which meant prices in September this year were considerably lower. Electricity, gas and other fuel bills fell by 7.3% on the year, the Office for National Statistics (ONS) said. Overall prices in September were unchanged from those seen in August, the ONS added. Rising energy prices meant that inflation was likely to rise again in coming months, said Jonathan Loynes of Capital Economics, adding that the return of VAT to 17.5% from its current temporary 15% level would also push CPI back towards 2% by turn of the year. However, he forecast the "huge amount" of unused production capacity in the economy would eventually push inflation down sharply, "keeping alive the threat of a period of outright deflation late next year or beyond".

Deficit impact

Meanwhile chief economist at Schroders UK, Keith Wade predicted this would "probably will be the low point in inflation". The inflation data showed that the government's pumping of about £160bn into the the economy's money supply - so-called quantitative easing - had not yet taken effect , said James Hughes, chief economist at Black Swan Capital Wealth. "Ordinarily when governments print money, sell bonds, nationalise banks and go on an enormous quantitative easing spree, the eventual outcome is inflation," Mr Hughes said. But he added that the huge budget deficit, welfare system commitments and "uncompetitive" exchange rate meant the supply of money had not yet fed through to prices.

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Notes …

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