The pound has been steadily falling as the Brexit referendum and Bank of England’s moves to shore up the economy have pushed investors into selling the pound.
Its downward slide over the last 12 months means sterling is now worth 16 per cent less against the dollar, at £1/$1.31, compared to £1/$1.56 previously. It’s even weaker against the euro, having fallen 18 per cent in the last year, down to £1/€1.18.
The pound fell again as the Bank of England announced a batch of measures to prevent the emergence of a post-Brexit crisis.
Everyone’s agog at the impact of the rate cuts, but the relative strength of sterling has a considerable effect on our economy too.
The most visible impact from weaker sterling will be through inflation. The lower pound increases the cost of imports, which means price inflation in everyday items, such as food and energy.
Inflation has ticked up slightly in the brief period since the Brexit vote, reaching 0.5 per cent last month. This has been attributed to a trio of higher oil prices, fuel prices and air fares.
The Bank of England now expects inflation to rise further, reaching 2 per cent and then probably surpassing it.
However, inflation isn’t solely down to the strength of sterling. Prices on the high street are also tempered by competition between retailers, and at the moment it’s fierce – particularly in food and clothing. The cost of basic raw materials such as oil and grains also play a part.
“High streets across the country are emblazoned with windows proclaiming sales of up to 80 per cent, reflecting an un seasonal spring and summer again,” says Clive Black, head of research at Shore Capital.
“We see intense competition on the high street, steady crude oil prices and what looks like being another very substantial northern hemisphere maize and wheat harvest.” All of these can keep inflation in check.
For businesses, higher inflation means revenues will be up, or in theory at least. But that assumes people buy the same amount. With the appearance of 2 per cent inflation and an uncertain economic environment, people may choose to save rather than spend. And higher import costs for businesses will cancel out the positives too.
“Overall, a weaker sterling would slow growth in the UK, because of the impact you get with inflation,” says Simon French, chief economist at Panmure Gordon.
Some experts argue a weaker pound won’t necessarily be a negative. This is because goods priced in pounds would be cheaper for overseas buyers, and thus, they are more attractive to international buyers.
It’s also cheaper for anyone based overseas to either visit, invest or buy property here (because their native currency can buy relatively more). On the face of it, that’s an economic boost.
This is the reason why central banks dotted around the world including Japan’s, China’s and the European Central Bank are all trying to devalue their currencies in a competitive game dubbed “currency wars”.
From this perspective, a fall in sterling doesn’t mean bad news.
Bank of England governor Mark Carney had a word to say on this. He noted the 9 per cent fall in the value of sterling since Brexit, and said it would boost UK exports. However, on balance the bump given to exporters “are not expected to offset fully the hit to demand”. So overall the economic effect will be negative.