Irish Intercontinental Bank has predicted a significant fall in the value of sterling over the next twelve months as the currency weakened sharply yesterday.
Sterling was dragged down at one stage to a two-month low against the dollar (at 1.6225) and a seven-week low against the mark (at 2.8970) amid more evidence of a slowing UK economy.
The Irish markets were closed yesterday and the pound closed at 86.34p against sterling on Friday. Most economists have predicted a decline in the value of sterling and IIB says it should fall to around 95p against the pound over the next year. It said it has also identified a threat of a move to well below parity, to somewhere between £1.05 and £1.15, on a three-year view. Mr Austin Hughes, IIB's chief economist, has warned that "significant volatility in sterling about a pronounced weakening trend may become a source of difficulty to Irish corporates dealing with the UK". If sterling does move in this way, "it could cause a substantial weakening in Irish economic activity into the medium term".
However, Mr Tom Foley, executive director of IIB, noted that a decline in sterling to these levels "could act as a significant valve against the threat of a lasting deterioration in Irish inflation". This, he added, "heightens the importance of enhancing competitiveness in forthcoming decisions on tax policy and pay deals".
Sterling's sharp fall yesterday "shows how vulnerable it is to weak data. The data was nothing really new, but it shows the slowdown in the economy is spreading", said Mr Nick Stamenkovic, chief European economist at Bank Austria Creditanstalt Futures. The latest UK data showed manufacturers' export orders falling for the seventh consecutive month, with the rate of decline being accelerated by the Asia crisis and sterling's strength. But the survey also noted domestic orders falling for the first time since the early 1990's recession. The data adds to the growing list of weak UK data and industry groups' increasingly bearish assessment of the British economy. "No doubt today's numbers will lead to further cries from the CBI and manufacturers for a lower level of sterling and for interest rates not to go up," said Mr Stewart Newnham, international economist at First Chicago in London. "But it has to be remembered the Bank of England is targeting inflation, not output." The market's main focus remains on the bank's monetary policy committee's two-day meeting which concludes on Thursday.
IIB said its research had identified a number of factors which supported its view about the future trend of sterling. The UK economy has passed the peak of the business cycle and "is likely to show a pronounced weakness in activity over the balance of the year and through 1999". This, IIB contended, "should ease current concerns about inflation in Britain and switch the focus to the threat of recession, a not insignificant risk to the Irish economy".
The bank also feels that a notably weaker British economy should cause a significant change in thinking at the Bank of England within the next few months. That should lead to expectations of a substantial easing in UK interest rates before the end of the year. IIB noted that the introduction of the single currency could lead to greater volatility in foreign exchange markets. In that scenario, and sterling's diminishing global status, coupled with the investment attractions of the euro, sterling could fall more sharply than generally expected. That, the review predicts, could lead to sterling moving to well below parity to the pound.
