Weaker pound could revive economy

THE British pound, which fell to a four-year low against the euro, may extend declines after the Bank of England said it discussed cutting interest rates this month and said a weaker pound helps the economy.

This has the net effect of making Irish exports to Britain dearer but should help Irish inflation levels if suppliers and retailers pass on savings on imports to customers.

The pound was trading at 69.46 pence per euro at 11:25am in London from 69.50 yesterday. It earlier fell to 69.78, the lowest since February 12, 1999. Against the dollar, it dropped to $1.5739 from $1.5768 yesterday.

BOE policy makers voted 7-2 this month to keep interest rates at 3.75%, compared with 8-1 in March, the bank said yesterday.

The economy probably grew at the slowest pace in a year in the first quarter, economists expect a report Friday to show, increasing speculation the bank may pare rates in coming months.

"There's an ever-present dovish tone amongst policy makers," said Adrian Hughes, a currency strategist at HSBC, who expects the pound to decline to 73 pence by year-end. A faltering British economy "will be reflected in Friday's growth data."

The central bank probably will lower borrowing costs by a quarter percentage point to 3.5% next month, according to 22 of 28 economists surveyed by Bloomberg News last week. Lower interest rates tend to weaken a country's currency by reducing deposits denominated in its currency.

"It has been the downgrading of growth expectations in Britain that has hurt sterling,' said Jeremy Stretch, an analyst at RBC Capital Markets. "It's probably the case that if consumption does continue to be scaled back, we'll get another BOE rate cut."

In the minutes of its April 9 to 10 meeting, the British Monetary Policy Committee agreed that the weakening of the pound would help revive the economy, as would rising stocks and lower oil prices. It said the question also was whether investment, external demand and government spending would pick up fast enough to offset a slowdown in consumer spending.

The pound also weakened after a report showed Britain's budget deficit widened more than expected in March, analysts said.

The public-sector net cash requirement was 11.1 billion pounds ($18 billion), up from 7.8 billion pounds in the same month a year earlier, the government said. Economists expected a deficit of 10 billion pounds. Revenue fell 3.1% in March.

"In Britain it's all about the state of the public finances and the trade deficit," and signs they are worsening tend to weigh on the pound, said Mitul Kotecha, head of foreign exchange at Credit Agricole Indosuez, before the report.

The British military alliance with the US in Iraq, making it less of a so-called haven currency, also pushed the pound lower this year, analysts said.

Declines in the pound against the dollar may be limited on concern the US economy will struggle to lure the foreign investment needed to offset its current account deficit and sustain the value of its currency.

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