Pound Sterling Depreciation

Despite a 10% appreciation in the first half of 2009, at the end of June 2009 the £Exchange Rate Index was around 20% lower than in August 2007.

Sterling-ERI-BofE-08-09

Since July, the Pound has weakened again.

Why Is Pound Depreciating?

  • Low Interest Rates 0.5% and prospect of interest rates staying low throughout next year. This makes the UK less attractive to deposit money. (less hot money flows)
  • Bank of England suggesting low Pound is beneficial and they will not increase interest rates to protect pound.
  • Prospect of slow recovery which will keep interest rates low
  • Persistent Current account deficit. Governor of Bank of England has suggested Pound needs to fall to help rebalance trade.
  • Quantitative easing which is increasing Money supply and potential inflation. Inflation would reduce the value of Sterling.
  • Large Government Debt, partly being financed by Bank of England buying securities from created money. This makes markets nervous over future of Sterling.

There is more detail on this at Forecasts for Sterling in 2010

Note: difference between Depreciation and Devaluation

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