The Pound weakened yesterday against both the Euro and the Dollar, as the UK currency lost almost 1% in value versus its European counterpart, after UK mortgage approvals fell with banks granting just 23,376 loans for house purchases, indicating that the worsening property slump is pushing the economy deeper into a recession.
According to the report from the British Bankers’ Association, the number of new home loans was actually up from 22,416 in December, as the most aggressive cut in UK interest rates in history encouraged banks to step up lending.
House prices have fallen 17.2% from a year earlier, while mortgage approvals tumbling 43% from this stage in 2008, as the government introduces a series of new measures to revive the mortgage market, ordering Northern Rock Plc to expand lending by £14 billion.
A separate report also showed that business investment has slipped 3.9% in the fourth quarter of 2008, while the downside momentum surrounding the Pound intensified as UK stocks dropped as much as 2% on the session, creating an element of risk aversion that encouraged investors to come out of Sterling.
The FTSE 100 Index has lost 41% since the start of the year already as financial firms on a global scale notch up $1.1 trillion in credit-related losses and economies worldwide fell in to the first simultaneous recession since the end of the Second World War.
Bank of England policy maker Andrew Sentence added to the gloomy sentiment for the Pound, as he said that the UK may experience a prolonged period of deflation if the recession intensifies, adding to the case for the Central Bank to buy corporate bonds in an effort to stimulate growth.
The Bank’s monetary policy committee have unanimously agreed to ask the government for the authority to create and pump money into the banking sector, after cutting interest rates to an historic low of 1%, which has seemingly failed to halt the decline.
Speaking at the Institute of Economic Affairs, Sentence said that recent reductions in borrowing costs should begin to take affect towards the middle of the year but “the risks are still weighed to the downside at this stage.”
The most aggressive policy easing on record combined with a weaker Pound should help bring the UK out of the recession but the Bank of England’s latest estimates show that the economy will contract at an annual pace of 4% by the end of the first quarter, while inflation will slow to 0.5% by the end of 2010, as falling prices increase the risk of deflation.
The Pound may come under some pressure this morning amid the release of the revised estimates of UK gross domestic product in the three months through December.
The report will probably reveal a greater contraction in economic growth than preliminary forecasts, while the UK currency may be susceptible from comments from the BoE governor Mervyn King and MPC member David Blanchflower,, who are scheduled to address Parliament on the banking crisis.
The Euro unexpectedly made versus against the Pound yesterday, while the single currency also bounced back against the Dollar amid speculation that the European Central Bank will refrain from pursuing quantitative easing policies, despite escalating tensions over the banking sector in Eastern European nations.
In terms of economic data, the Euro was unaffected by reports from the Ifo institute in Munich, who said that its index measuring German business confidence dropped to the lowest level in 26-years in February, as the worst recession since the Second World War ravaged the financial sector, prompting companies to slash jobs and curb production.
The index actually fell to a reading of 82.6 from 83.0 in January, the worst result since November 1982, despite expectations for the index to hold steady, following the government’s decision to double the fiscal stimulus package to roughly €80 billion. While the Central Bank has given a very strong indication that the governing council will cut interest rates to a record low next month in the fleeting hope of a recovery later in the year.
Elsewhere, European industrial orders declined for a fifth straight month in December as the global slump in demand weighed heavily on export growth in the region, with orders falling 5.2% from November, marking the longest period of declines since the data was first published in 1994.
Chancellor Angela Merkel’s stimulus program includes tax cuts and infrastructure investment, amounting to nearly 1.6% of gross domestic product, making it the biggest spending boost in Europe but the Euro may come under pressure this morning as the revised details of fourth quarter economic growth in the region will probably show a worsening slump.
The Dollar declined against the majority of the majors yesterday after U.S consumer confidence collapsed in February as the Conference’s boards index dropped to the lowest level since the data began in 1967, sparking fresh concerns that the economy is heading towards a depression.
In addition, a separate report showed that U.S home values plunged again in December, with prices dropping 18.5% year-on-year in December, as banks seized real-estate and mounting foreclosures exceeded the all-time high of 2.7 million.
The Chairman of the Federal Reserve Ben Bernanke delivered his semi-annual testimony to the Senate and warned that the slump in the economy may last well into 2010. Bernanke urged policy makers to take “strong action” as the Obama administration attempts to revive confidence with a number of fiscal stimulus measures, aimed at creating jobs and helping homeowners.
Data Released 25th February
U.K 09:30 Gross Domestic Product (Q4 Revised)
GER 07:00 Gross Domestic Product (Q4 Details)
U.S 15:00 Existing Home Sales (January)
written by Adam Solomon
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