How Low Can the Pound Go?

As the Bank of England's Monetary Policy Committee meets this week to decide on interest rates, the world's oldest currency still in use is under attack.

Lately, the sterling pound has experienced the sharpest fall against the dollar since Britain crashed out of the European Exchange Rate Mechanism in 1992, dropping 8.32 percent in August alone. And after Chancellor of the Exchequer Alistair Darling said the UK was in arguably the worst crisis for over 60 years, the pound fell further, plunging to a 29-month low.

UK GDP growth stalling in the second quarter, house prices falling at the fastest pace since 1991 and mortgage approvals dropping to a record low of 33,000 in July do not help the suffering currency. A far cry from the times when sterling, linked to the old German world "ster" meaning strong, stable and reliable lived up to its name and the days when Sir Isaac Newton was Master of the Mint.

Amid ever gloomier forecasts, will the Bank of England decide to lower its base rate this month from the current 5 percent? Or is this, as indicated by the UK government's unveiling of a £1 billion ($1.8 billion) scheme to rescue struggling home owners, more about the housing market than the exchange rate?

"The MPC couldn't possibly factor it (the housing rescue) in for an outlook on activity and growth, it will have no material impact," Jonathan Loynes, Chief UK Economist at Capital Economics told "The Chancellor was never going to ride to the rescue."

He believes that despite the slide in sterling, the bank will move towards rate cuts as soon as November, to coincide with the release of the next quarterly inflation report.

When Mervyn King, Governor of the Bank of England, presented the last quarterly inflation report, he admitted he doesn't "pretend to know what will happen to exchange rates." However, given the troubles in the world economy, a fall in sterling would "help to cushion us from those effects," he said referring to weaker exports.

"There is a positive side, it means a loosening in policy and rebalancing of the economy, it's not the end of the world, we're just playing catch up," David Bloom, Global Head of Foreign Exchange Strategy at HSBC told " The speed is a bit of a shock no doubt, but we never thought sterling would be so high and have been waiting for it to move."

However, this means the Bank of England is more likely to keep rates unchanged for the moment, Bloom added. "People see it as some sort of machismo …the US took it on the chin and their exports picked up, which helped the economy."

But the UK really needs the rest of the economy to grow as its export sector is relatively small compared to housing, retail, and consumer spending, Loynes pointed out, adding that he still sees a strong need for rate cuts.

Loynes predicts that sterling could fall as low as $1.65, whilst Bloom sees it settling at $1.75 by year end.