Sterling takes a royal pounding - FT.com

Summary:
In the UK, high borrowing costs, a painful housing market correction and losses in the financial sector mean most of the UK's assets have been dramatically revalued down. Sterling has suffered as a result. However, was overvalued. Sterling s likely to fall further in the long run, as the North Sea fields wind down and the UK imports more oil and gas. Questionable government schemes have reduced confidence in the pound. Bank of England, needs to worry about weaker pound, not government. The MPC must now contend with rising import costs. Weakness of sterling means the Bank will need tighter monetary policy than would otherwise be necessary to bring inflation back down to the target of 2 per cent from its August level of 4.4 per cent. (Published: 03/09/08)

Summary:

• UK is exposed in three ways to the aftermath of the credit squeeze
• has heavily overvalued housing
• has most indebted consumers in the world
  
• has an economy that is peculiarly reliant on financial services
• high borrowing costs, a painful housing market correction and losses in the financial sector mean most of the UK's assets have been dramatically revalued down
• Sterling has suffered as a result
• is now trading at levels closer to those it plumbed in the aftermath of Black Wednesday than to the highs of last summer
• shift was inevitable: pound was overvalued last year
• moving away from growth based primarily on consumer and business spending at home to an equilibrium that encourages more exports is a necessary correction
• on a real trade-weighted basis, the pound is now at its historic average
• is likely to fall further in the long run
• as the North Sea fields wind down and the UK imports more oil and gas
• big danger is that a weak government will resort to more of the panic measures that have done such damage to confidence in the UK over the past 12 months
• Bank of England, needs to worry about weaker pound, not government
• the MPC must now contend with rising import costs
• weakness of sterling means the Bank will need tighter monetary policy than would otherwise be necessary to bring inflation back down to the target of 2 per cent from its August level of 4.4 per cent