Bank bailouts and bargain-hunting consumers won't help, but the pound should pick up this year, says Mark Deans


Sterling's fall this year against the euro and the dollar may prove to be the final nail in the coffin for many grocers specialising in imports. As consumer savings are squeezed by low interest rates and sales at leading high-street retailers continue to fall, the outlook for grocers looks pretty bleak.

Earlier this month, the Bank of England kept interest rates at 0.5%, but the positive knock-on effects may not be enough to reverse fortunes. The Bank cannot add much stimulus by cutting rates further from here, so 'quantitative easing' is being touted as the stronger solution . In an industry where cash is king, it's the availability of credit and the ability to borrow that is more important than its price.

With interest rates at their lowest-ever level, the lure of sterling has diminished due to its low yield. The risk is that sterling will remain on the back foot until mid-2009.

At the start of the year it seemed plausible that sterling could recover, since bad news surrounding the pound had been priced in already. This was in contrast to the euro, as investors started to switch out of euro-based assets, on concerns that the downturn in the Eurozone might be particularly prolonged. The euro hasn't weakened dramatically yet, but it has become apparent that major European banks are heavily exposed to Eastern Europe, which has suffered its own sharp downturn. The European Central Bank was forced to cut rates again this month by 0.25%. More ominously, the Bank also had to discuss its own quantitative easing .

Recent bank bailouts may stifle the pound's current rally and the pressure is on consumers to seek value for money. This is likely to be reflected in the discount end of the market pulling in more customers.

This month's G20 meeting in London and the promise to inject $30bn into the world economy was a definite fillip for sterling. Whether this signals the beginning of a move back to levels we enjoyed 12 months ago remains to be seen. Most market analysts do expect to see sterling back at more healthy levels in the second half of this year. But at least for the short term, grocers will have to tighten their belts a bit further.


Mark Deans is dealing manager at Moneycorp.