Sterling has fallen sharply on foreign exchange markets after the publication of a Confederation of British Industry survey which shows that factory orders in the UK from both overseas and domestic buyers have fallen to a 12-year low.
Sterling fell against a range of European currencies and from an opening level of DM2.955 against the deutschmark, the British currency closed down almost four pfennigs on DM2.9175. Against the pound, sterling went from 84.9p to 86.1p, with dealers expecting further weakness with no fundamental support for the British currency at current levels.
Bank of Ireland chief economist Mr Jim Power said the sterling weakness was down to two factors: the CBI survey which showed a collapse in both overseas and domestic orders from manufacturers as well as comments from Mr Willem Buiter, a member of the Bank of England's monetary policy committee, that suggested that the prospects of a rise in British rates were lessening.
With yesterday's CBI figures improving the prospect of an interest rate cut at next week's key meeting of the Monetary Policy Committee, further weakness in the value of sterling will benefit both Irish importers and also the Government. Lower import prices from the UK will reduce the inflationary pressures in the economy and could dispel fears of inflation moving towards 4 per cent before it peaks.
The CBI said that a cut in British interest rates, which have been raised six times since the Labour government came to power in June 1997, was now vital. Domestic manufacturing orders fell for the first time for more than two years and output has dropped for the first time in five years. The CBI predicted that output would fall further during the coming four months.
Business leaders' expectations are lower than at any time since July 1991, while intentions to invest in plant and machinery have also hit a low point since July 1991. The CBI said that uncertainty about demand was the most significant constraint.
The London Business School has stated that the mix of fiscal and monetary policy in Britain is hurting manufacturing without tackling the source of inflationary pressure - the service sector. Mr Neil Blake and Mr Paul Robson in an article in Economic Outlook said high interest rates were, via a high exchange rate, damaging manufacturing, which did not pose an inflationary threat in any case.
"On the other hand, high interest rates are as yet having little impact on private services, where the real threat to the inflation target lies." --(Additional reporting by AFP, Reuters)
