Pound's Brexit vote battering continuesComments
The pound’s Brexit vote battering continues, and experts see no end to its fall in value against other currencies.
Sterling slid back below $1.23 on Tuesday and also slipped against the euro to well below 1.11 euros.
The past four days for the pound are now its worst since the aftermath of the vote to leave the European Union in June.
Bank of England policymaker Michael Saunders warned a “bumpy” Brexit could sharply reduce British economic growth.
“Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely,” Saunders told British lawmakers in a written submission.
Hard Brexit fears
Part of the problem is that the financial markets are keener on the dollar, believing interest rates in the US will be raised in December, but investors are also extremely nervous about the conditions under which Britain will leave the European Union, specifically a “hard Brexit” in which Britain no longer has access to the EU single market.
Higher US rates seem main driver lifting $USD across the board. idiosyncratic problems ail #GBP, and #ZAR— Marc Chandler (@marcmakingsense) October 11, 2016
Exports good, imports bad
For British businesses the weak pound provides a boost to exports but it works against those who have to import anything.
Independent market analyst Jeremy Batstone-Carr explained: “If you happen to be in the manufacturing sector and you have to order component parts from abroad, then sterling’s weakness is an extreme problem.”
Though he admitted it’s not all negatives: “I think for many in business, sterling’s weakness is a boon, particularly of course the export sector of the economy and given the trade situation that’s no bad thing. I think they’ll be a lot of interest in fourth coming inflation data of course, that sterling’s weakness coupled of course with base affects associated with the oil price, we could very well see quite a significant spike in headline inflation which may very well serve to underpin the pound, which of course has been extremely weak. Many in the financial markets I think quite rightly are wondering how much further in the near term this sterling weakness has to go.”
More expensive oil – which is priced in dollars – is one effect.
Imports costing more means companies will have less money available to invest to improve and grow.
Daniel Vernazza, Lead UK Economist at UniCredit said ordinary people will feel the effects, and consumer confidence will decline: “It will take time for the consumer to be hit, and it will come in two ways. It will come through in higher prices, and passed on through higher import prices as a result of the weaker sterling and it will come through reduced confidence, which will come after we see job losses probably. We haven’t seen any job losses in the mass yet, but over time we should start to see that, and unemployment will start to rise and then consumer confidence will be hit.”
Not everyone thinks the fall in the value of the pound against other world currencies is a bad thing.
Lord Mervyn King, the former head of Britain’s central bank, told Sky News the Brexit vote is “not the end of the world” and some of the effects are useful to the UK’s economy: “During the referendum campaign someone said, he said, you know ‘The real danger of Brexit is – we’ll end up with higher interest rates, lower house prices and a lower exchange rate.’ And I thought ‘Dream on’. Because that’s what we’ve been trying to achieve for the past three years and now we have a chance of getting there.”
Though that is of little comfort to those Britons already struggling to pay their bills and who face higher prices and the prospect of job losses.
Notes on Brexit and the Pound https://t.co/aOZFaAhyhg— Paul Krugman (@paulkrugman) October 11, 2016