THE POUND dropped to a fresh low against the euro yesterday, falling closer to parity against the single currency on expectations that UK interest rates were heading lower.
The pound has suffered against the euro, dropping a record 17 per cent this month, as investors bet that the Bank of England will slash interest rates, which stand at 2 per cent, at its policy meeting next month. Indeed, bank officials have hinted that the UK could follow the US and adopt a quantitative easing approach to monetary policy.
This would involve pumping money into the financial system once rates, in effect, hit zero.
In contrast, the European Central Bank has adopted a more hawkish tone, indicating that it will keep euro zone interest rates on hold at 2.5 per cent as it assesses the impact of the global economic slowdown.
The UK pound weakened to a record 97 pence per euro, a development which Isme, the organisation representing small and medium-sized enterprises, described as a “disaster”.
In its end-of-year statement Isme said the small and medium-sized enterprise sector had been hit during the year by energy cost increases, fluctuations in currency prices, weakened consumer confidence and demand, and a cutback in credit availability.
The collapse in the value of sterling has had a “disastrous effect” on businesses exporting to the UK, it said.
Lack of certainty, scarcity of credit and costs were the sector’s three greatest concerns.
“The Government continues to have a negative influence on the cost environment through local charges, waste, commercial rates, water charges, continued high current expenditure, and the increases in the public sector pay bill.
“It is now absolutely essential that the Irish business cost base be brought into line to allow us to compete.
“The Government has a key responsibility in this area, and it is imperative that action is taken to control costs under its remit.”
Isme called for the cancellation of the latest national wage agreement for both the public and private sectors. “Strong leadership is now required to put the good of the country before the self-centred demands of the public sector unions.”
On employment, the organisation said the sector it represents has seen “a monumental increase in the number of job losses , particularly in the last quarter”.
“There is a strong indication that an unprecedented number of job losses will be announced in the new year, particularly as companies review their options following the Christmas break,” said Isme.
On the availability of credit, the organisation said that while the banks had managed to wage a successful public relations campaign to promote their message that they were open for business, “the experience of the small business sector is that the banks are unwilling to lend to even the most viable small businesses without attaching significant and onerous conditions”.
A “clear decisive strategy” is required from the Government to address the problems facing the public finances and the economy generally.
Exchange rates and recession in the UK and the US, as well as energy prices and the uncertainties in the global financial system, are likely to be the main external factors affecting business in 2009, it said.
“On the domestic front, the general cost environment, together with access to affordable finance and cost competitiveness, will be major influencers on the performance of the SME sector in the next 12 months.” – (Additional reporting: Financial Times service)
