The pound fell heavily yesterday against all but the high yielding currencies after the gloomiest ever economic forecast of the UK economy from the Bank of England since it gained independence in 1997.
In its quarterly inflation report, Governor Sir Mervyn King announced that the Bank was reducing its 2013 UK growth forecast to about 1% citing "a greater risk that the UK economy may be in a period of persistent low growth”, with problems in the euro zone and the rest of world continuing to have an impact at home.
Sir Mervyn added that this was due to "a rather unappealing combination of a subdued recovery, with inflation remaining above target for a while".
Commenting on the report, Dr Howard Archer, Chief UK economist at IHS, said the report and Sir Mervyn's accompanying comments suggested that the door was very much open to more QE, as well as meaning interest rates could stay low for "a very long time to come".
The Bank of England report came hot on the heels of the latest unemployment data from the Office for National Statistics which showed that unemployment in the UK fell between July and September by 49,000 to 2.51 million but experts suggested there were signs the labour market was losing steam.
The UK unemployment rate for July to September fell by 0.2% to 7.8% between April and June against a consensus figure of 7.9%.
Martin Beck, UK Economist at Capital Economics, said that the latest data suggested that the UK labour market might be beginning to weaken as the 'Olympics effect' faded.
The pound managed to make some headway against the high yielding risk based currencies like the Australian and new Zealand dollars yesterday as risk aversion continues to dominate the international markets with ongoing concerns about the euro zone sovereign debt crisis and the US fiscal cliff.
Obama’s administration and Republican lawmakers need to strike an agreement to avoid $607 billion in spending cuts and tax increases that take effect on 1 January 2013 which according to a report by the bipartisan Congressional Budget Office could reduce US GDP by up to 4.5% next year, hurtling the biggest economy in the world back into a serious recession.
Money Transfers to New Zealand:-
The risk aversion dominating the world markets tends to have a depreciating effect on high yielding risk based currencies like the New Zealand dollar so rates improved yesterday afternoon. However, the pound has fallen back this morning, as news of the new Chinese leadership takes an element of political uncertaintity out of the equation.