UK pound’s post-Brexit plunge echoes past crises

Jamaica Gleaner - - BUSINESS -

THROUGH­OUT THE 20th cen­tury, Bri­tain en­dured a series of cur­rency crises that ex­posed its de­cline as a ma­jor global power.

The re­cent slide in the pound ster­ling has reawak­ened mem­o­ries of those trou­bled times, in­clud­ing one in the mid-1970s when the coun­try ended up need­ing an in­ter­na­tional bailout.

And it has raised ques­tions of whether an­other so-called ‘ster­ling cri­sis’ might push the gov­ern­ment to soften its plans to break away from the Euro­pean Union and its sin­gle mar­ket.

The pound has fallen by nearly a quar­ter against the dol­lar since the June 23 vote to leave the EU, from around US$1.50 to a 31-year low be­low US$1.20. That scale of fall is equiv­a­lent to some of the great de­pre­ci­a­tions over re­cent decades, from 1949 through to 1992, that have caused up­heavals in gov­ern­ment pol­icy and shaken the econ­omy.

Si­mon Der­rick, chief cur­rency strate­gist at BNY Mel­lon, said the cur­rent drop in the pound is so far echo­ing how pre­vi­ous cur­rency crises un­folded: A series of pound ster­ling bank notes is dis­played. The pound has been los­ing value after UK Prime Min­is­ter Theresa May put a more de­fin­i­tive time­line on the trig­ger for Brexit.

“Given his­toric move­ments, it’s been very much busi­ness as usual.”

Though a weaker pound can boost ex­ports and help re­bal­ance the econ­omy from be­ing overly re­liant on con­sump­tion rather than trade and in­vest­ment, stan­dards of liv­ing in the coun­try could drop in com­ing months as in­fla­tion pushes higher. A weaker cur­rency makes im­ported food and other goods like fuel more ex­pen­sive and re­duces pur­chas­ing power abroad.

The pound’s drop has has­tened since new Prime Min­is­ter Theresa May in­di­cated that her gov­ern­ment hasn’t ruled out a com­plete break from the EU sin­gle mar­ket, which could bring back ex­pen­sive tar­iffs for trade with the other 27 EU coun­tries, if that’s what is needed to limit im­mi­gra­tion.

START TO MOUNT

So far, it seems May – like many of her pre­de­ces­sors at 10 Down­ing Street – is pre­pared to let the pound weaken as it helps cush­ion the im­pact of the Brexit shock on the econ­omy by boost­ing

ex­ports. But there is a limit to what she and her gov­ern­ment will be will­ing to en­dure.

Der­rick says that limit could be when the pound hits one-toone with the euro or the dol­lar, some­thing that has never oc­curred with ei­ther cur­rency. At present, the pound is worth around US$1.23 and euro1.12.

“It (par­ity) will res­onate with a gov­ern­ment that is still pretty fresh,” said Der­rick. “They will be well aware that crit­i­cism will start to mount.”

Should the pound drop to such lev­els over the com­ing months, in­fla­tion will likely pick up to rates that have a real im­pact on house­holds’ in­comes. And Bri­tish hol­i­day­mak­ers will, if they haven’t al­ready done so, see how much less their money buys them abroad — ef­fec­tively mak­ing them poorer.

It is these sorts of un­in­tended con­se­quences that have his­tor­i­cally got gov­ern­ments con­cerned.

Of­fi­cial fig­ures this week showed the an­nual rate of in­fla­tion is run­ning at a near two-

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