Jim Rogers: ‘Sell any sterling you might have. It’s finished’

Author: By Sean O’Grady, Economics Editor

One of the world’s leading investors voiced the markets’ concerns. Jim Rogers, of the Singapore-based Rogers Holdings and co-founder of the Quantum fund with George Soros, told Bloomberg Television: “I would urge you to sell any sterling you might have. It’s finished. I hate to say it, but I would not put any money in the UK.”

Mr Rogers added that the pound will fall below its record low of $1.0520 reached in February 1985. Given near parity with the euro, it raises the intriguing possibility that the pound/dollar/euro exchange rate could yield a “triple parity”.

At the same time, the Office for National Statistics released the latest inflation figures, down sharply to 3.1 per cent in December, from 4.1 per cent in November. Investors took this as a sign of the weakness of demand in the UK economy, rather than of its fundamental strength. Before the official growth figures for the last three months of 2008, to be published on Friday, the Governor of the Bank of England, Mervyn King, warned that the world economy had “fallen off a cliff” and that, for the UK, “total output in the fourth quarter is expected to have fallen sharply. In the first half of this year, the rate of contraction is likely to continue to be marked”. Some economists believe that the figure will be -1.5 per cent, one of the sharpest downturns since the Second World War.

Mr King also acknowledged the “risk” that inflation would drop below the target rate of 2 per cent in coming months, and confirmed that the Bank would embrace “unconventional measures” ? also known as quantitative easing, or printing money ? to stimulate the economy. Most economists believe that inflation will come close to zero before the end of the summer, and, on the RPI measure, will actually turn negative.

The Bank and the Treasury have so far remained relatively relaxed about the decline in sterling, believing that a boost to exports and manufacturing would help “rebalance” the economy, but that may change as the depreciation shows signs of turning into a rout, because of a lack of confidence in the British authorities to manage the situation. Worries about the scale of government borrowings, the cost of bailing out the commercial banks and that the slump in sterling will become self-reinforcing helped to push the pound to an eight-year low against the dollar, an all-time low against the yen and back towards parity with the euro. In trading, the pound crashed as much as 4 per cent to lows of around $1.386, in its biggest one-day slide against the dollar since Britain fell out of the European Exchange Rate Mechanism in 1992.

Neil MacKinnon, director and chief economist at ECU Group, said: “There’s a real danger of the decline in sterling becoming a full-blown crisis. The Government and the Bank of England have to change their tune on the pound pretty quickly.”

However, John Higgins, of Capital Economics, said: “It is perhaps not surprising that investors are getting increasingly nervous about the health of the UK’s public finances. The 5-year credit default swap for the UK government has widened by 25bp since early January. ‘Printing press’ headlines make for uncomfortable reading. But there is little reason to think that the adoption of quantitative easing should be negative for the pound, any more than for the dollar.”

Unlike the dollar and the euro, though, sterling does not enjoy the backing of a large economic area, nor the status of a “reserve currency”, its banking sector is unusually large in relation to national GDP (400 to 450 per cent), and the UK economy is forecast, by the IMF and others, to be due for the biggest contraction of any major advanced economy in 2009.

Even weaker demand and output than previously thought is helping to push inflation down by the fastest pace since the recession of the early 1990s. The Government’s VAT reduction and heavy pre-Christmas discounting on the high street drove the December CPI down to 3.1 per cent. The RPI, which includes housing costs, plunged from 3 per cent to 0.9 per cent, helped down by lower interest rates. Reductions in clothing and fuel prices were the other significant factors; that the falls were not even bigger may be due to the precipitous fall in sterling. Some economists believe the RPI could decline to as much as ?5 per cent for a time in the summer, with the CPI hovering around zero, all of which will keep up the pressure for bank rate moving down from its current level of 1.5 per cent.

Colin Ellis of Daiwa Securities said: “The prospect of inflation getting below zero and staying there is the key reason the Monetary Policy Committee has been cutting bank rate aggressively ? and was also arguing behind the scenes for the pot of money the Government gave it to fund security purchases. This asset-buying facility is not strict quantitative easing yet ? it will be funded by T-bills, not by creating money ? but it sets up a framework for how the MPC will try to reflate the economy once rates get down near zero. That is increasingly only looking like a matter of time.”

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