Energy gap may 'wipe 20% off £'

A LEADING economics think-tank warned today that sterling could fall by as much as 20% because of the decline of Britain's oil and gas industry.

The £7bn trade surplus in fuel in 2000 is forecast to swing to a deficit of £4bn by 2008, says a report from the Centre for Economics and Business Research. Rising gas production and a recovery in oil output helped underpin gains for the pound in the 1990s.

'It is possible that a decline in sterling triggered by a realisation that the energy account is going into the red could cause the currency to move back closer to where it ought to be on fundamental grounds,' the CEBR said.

Sterling is at 11-year peaks against the dollar, with investors keen to snap up the relatively high yield offered by UK assets. The CEBR said the turnaround in the balance of trade in fuel could trigger a decline of between 4% and 6% in sterling. However, the drop could be as big as 20% as investors bale out of the pound.

Recent trade figures revealed that Britain has become a net oil importer for the first time in 12 years. Volumes from the North Sea have been declining for some time as fields mature and new finds are harder to come by.

'If it were to occur, such a move would make life much more difficult for the [Bank of England's] monetary policy committee, who ultimately would be under pressure to raise interest rates to offset the inflationary impact of the lower pound,' the CEBR said.