Pound predicted to stabilise around 1.40 Euros
West Crete Journal, March 2008

>Last July, the pound was worth €1.49. But following the sub-prime lending and Northern Rock situation, it slid to its current value of around €1.31. A property then costing €150,000 (£100,671) would now effectively cost £114,503 - a rise of 13.7%.

currency graph courtesy of www.xe.com

However, the good news is that the euro's rise is likely to be trimmed soon. Paul Mortimer-Lee, global head of market economics at BNP Paribas, wrote on 29 February:

"I don’t think the markets have realised how much trouble the eurozone is in. While investment is holding up, consumer confidence is very weak. We expect a contraction in GDP (gross domestic product) in the eurozone in the second quarter and that ultimately the ECB (European Central Bank) will be forced to cut.”

According to BNP Paribas, that will mean that the ECB will have to cut its key interest rate from the current 4% to 3.75% in June and to 3.25% by the end of the year. The euro, on this basis, will drop back to $1.40 by the middle of the year (currently $1.50). If that prediction comes true, the pound will almost certainly rise against the euro, and eventually stabilise at around €1.43.

On 8 March, Charles Purdy of Smart Currency Exchange confirmed that this prediction looked likely:

"Sterling gained some ground against most currencies. The Bank of England kept UK interest rates on hold which was very much as the market expected. In February, UK consumer confidence continued to fall but the UK services sector did better than expected. This conflicting data highlights how difficult a job the BOE has. Cuts in UK interest rates are expected but timing will be the issue. The Euro sits at €1.311/£1 inter bank and is benefiting from the "benign" economic conditions in Euro land. Economic conditions are probably not that benign, just a lot better than elsewhere. The European Central Bank kept € interest rates on hold last week, which was as expected. The ECB also raised its forecast for inflation and trimmed those for economic growth. However the ECB stressed that it is mandated to ensure price stability, which has in effect ruled out any short or medium term Euro interest rate cuts."

We believe that, after the small gains against the euro in the last week, it looks like the pound reached it's lowest rate at €1.30, from last year's high of €1.49 (see graph above). Logically, it should stabilise somewhere in the middle, which would place it around €1.40. That figure ties in fairly well with the predictions above.

"What can we do about it?", we hear clients say.

Firstly, we have already pointed out to sellers that the pound has devalued, and they should not insist on price increases!

Secondly, if the experts are correct, it would seem best to wait a while and see how the pound moves. If it moves upwards as predicted, your sterling will buy more euros and should then hang on to it.

However if it starts slipping, the risk is that you won't be able to buy enough euros for your favourite property in Crete. In that case, we suggest you could hedge your bets by moving half your sterling funds into a euro account (see example for £100,000 below). If the pound later starts to climb, you will in theory have lost some of the extra euros you don't have right now. However, all properties and construction works here are priced in euros, and at least you will have bought enough of them to fund your Crete escape!




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