The fall in sterling since the Brexit vote has created a “sweet spot” for British exporters, but the overall impact of the currency’s slide is still likely to be negative, according to one of the Bank of England’s deputy governors.
Ben Broadbent, the deputy governor who oversees monetary policy, said British firms are currently benefiting because the fall in sterling was driven by expectations of a deterioration in trading conditions that has yet to happen, as the UK will remain in the EU for another two years.
Speaking at Imperial College, London, Mr Broadbent said the pound’s slide – it has fallen around 15 per cent against the dollar since the referendum – reflects a belief in currency markets that “leaving the EU will make exporting harder and more costly. To help compensate the currency needs to be cheaper”.
However, those changes won’t actually take place until the UK exits the EU, and their extent will depend on the final arrangements agreed with the EU. For now, therefore, UK firms stand to gain:
The costs and ease of exporting are unchanged but the returns to it significantly higher. With the world economy looking better than for some time the circumstances for the tradable sector could hardly be more propitious.
Mr Broadbent, formerly an economist at Goldman Sachs, said firms’ response to these conditions will be an “important determination of economic growth this year”. He said companies currently have “every incentive” to step up investment, but cautioned that worries about the future impact of Brexit is likely to discourage them. He added that “they’re probably already doing so somewhat”.
The Bank’s monetary policy committee expects that caution to persist this year, meaning, according to Mr Broadbent:
The negative effects of the depreciation on consumption (via import prices and household income) are expected marginally to outweigh its more positive effects on other parts of demand.