As sterling tumbles, Alistair Darling declares that the UK is facing its worst economic crisis in 60 years.
In an interview with the Guardian newspaper he admitted that the current economic downturn is likely to be more "profound and long-lasting" than most people had feared.
The mounting expectation that the UK is heading for a recession has meant that in August the pound suffered its worst month against the dollar since 1992, falling by 8%, which will have significant knock-on effects for the UK economy.
A string of weak data has weakened the currency including news that economic growth ground to a halt in the second quarter: house prices falling at their fastest pace since 1991 and retail sales falling to their lowest level in 25 years.
The weaker pound was good news for British exports which rose by over 2% in August, suggesting that sterling's decline has given manufacturers a competitive advantage.
The money markets are betting that the more the economy weakens the more likely it is that the Bank will cut interest rates. This in turn has weakened the currency as international investors anticipate a lower return from holding sterling.
The problem is that the opposite might happen because the more the pound falls the more our imports will cost which will raise inflation and make the Bank reluctant to cut rates. The Bank will probably be tempted to keep rates where they are until inflation falls of its own accord – predicted for the end of this year – before they start considering the wider economy.
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