British pound edges closer to dollar. So the Bank of England steps in to put the brakes on the skidding sterling
Like Humpty Dumpty, the British pound has had a great fall, shooting up British interest rates and wiping billions of pounds off share prices. All the Queen's ministers, moreover, are not agreed on how far they should or should not intervene to help put the battered pound back together again.
The crisis of confidence in the government's handling of the latest sterling crisis comes after a precipitous decline in the pound's value against the dollar, largely brought about by speculation that world oil prices -- and Britain's -- would soon decline. With the pound worth $1.1175 -- less than half what it was four years ago -- the possibility of pound-dollar parity is not being ruled out.
The Bank of England's intervention with a 1.5 percent hike in prime lending rates, on top of an earlier 1 percent rise, seems to have calmed the pound. But markets remain nervous.
Not everyone here though is in despair over the falling pound.
The tourist industry, now Britain's largest growth industry, is purring as thousands of Americans join the stampede for bargain prices in hotels, and at the china and woollen counters. One stately homeowner says its now cheaper for Americans to hold a conference in Britain -- including airfare -- than staying in the United States. A much lower pound also gives British exporters a field day. British exporters from manufacturers of jam and china to piston rings and luxury Jaguar automobiles are all pulling in heftier orders.
But the 2.5 percent rise in the prime lending rate at home means mortgage rates will certainly go up, and the timing could hardly have been less opportune for the government which was about to pull out a political plum.
Chancellor of Exchequer Nigel Lawson was just rounding out the figures that would have enabled him to proceed with about 1.5 billion ($1.68 billion) in tax cuts in his spring budget.
Both the chancellor and Prime Minister Margaret Thatcher remain adamant that tax cuts and curbs on public expenditure are essential to Britain's economic recovery.
Now both the government's monetary policy and the likelihood of those March tax cuts are in question.
The embattled government, which has had probably its worst financial week since coming into power in 1979 has tended to explain away the sterling crisis by blaming the soaring dollar and sagging world oil prices. In other words, on external factors beyond its control.
With Britain now the world's fifth largest oil producer, sterling is being treated as a petrocurrency. Yet Britain has taken the tumble in oil prices in stride since additional revenues have accrued because oil is priced in dollars. This resulting nest egg is what gave Mr. Lawson scope to make tax cuts.
The government's apparent indifference to a surging dollar and plummeting oil prices, however, only whetted the appetites of speculators. To them, the government hands-off policy was self-defeating since it was a sure sign the pound was at risk because the government wasn't committed to save it.
To add to the government's difficulties, its own supporters have been dismayed at the government's ineptness in handling its own public relations. Last weekend for instance it let the word out that it had every intention of adopting a hands-off policy toward the pound. Then, in a sudden about-face Monday, it rushed to raise lending rates to save the pound. One stockbroker in the City of London says the government ``pressed the panic button.''
Several key factors intrigue the experts:
1. Will government interventions through the Bank of England be enough to save sterling?
The reading here is that the fate of the pound is more a symptom of the dollar's strength than any inherent weakness of the British economy. The pound thus remains vulnerable while the dollar is rampant.
2. How long will the higher interest rates prevail, and will they blow the chancellor's economic strategy off course since higher rates spell higher inflation and lower investment?
Most analysts feel no serious harm will be done if the higher interest ratesare short-lived. There is a distinct feeling of d'eja vu about the latest increases since the country experienced similar increases only last July and had slowly extricated itself from them before the latest crisis hit.
3. How much does the sterling crisis suggest Britain is in deep economic trouble?
Most recent economic forecasts indicate that Britain now appears to be finally on the road to sustainable economic growth. In 1983 the economy grew 3.2 percent, greater than its major West European partners, and 1984 looks as though it will be in the range of 2.5 percent or 3.5 percent growth -- and higher if there had not been a miners' strike.
Yet unemployment continues relentessly, rising more than 250,000 in just the last year despite earlier government insistence that it was levelling off.