BREXIT

Jamaica Gleaner - - BUSI­NESS -

year high of 1 per cent — even be­fore any no­table im­pact from the fall in the pound. Some an­a­lysts es­ti­mate it could hit 4 per cent by 2018, which is dou­ble the Bank of Eng­land’s tar­get.

For Jane Fo­ley, chief cur­rency strate­gist at Rabobank In­ter­na­tional, the govern­ment is less likely to be con­cerned about the ab­so­lute value in the pound — un­less truly calami­tous — but rather con­tin­ued volatil­ity in the cur­rency. That would make it more dif­fi­cult for com­pa­nies to plan ahead.

“High lev­els of volatil­ity can have a detri­men­tal im­pact to the econ­omy,” Fo­ley said. “In some in­stances the size of a cur­rency’s move­ment may have greater rel­e­vance to pol­i­cy­mak­ers than its ac­tual value.”

The pound’s drop is evok­ing mem­o­ries of one of the most defin­ing mo­ments in post-war Bri­tain, when in 1976 the then Labour govern­ment had to ap­proach the In­ter­na­tional Mon­e­tary Fund for a loan after the cur­rency fell by a quar­ter to a then record low against the dol­lar.

In re­turn for the loan — at US$3.9 bil­lion, it was the largest the IMF had ever made — the govern­ment had to change eco­nomic poli­cies and cut spend­ing and clamp down on wages. The pre­scrip­tion is the same as what Greece is be­ing forced to do to­day.

The episode trashed Labour’s rep­u­ta­tion for eco­nomic com­pe­tence and fos­tered the rise of the free-mar­ket ide­ol­ogy and the rise to power in 1979 of Mar­garet Thatcher’s Con­ser­va­tive Party. But the Con­ser­va­tives also saw their rep­u­ta­tion for eco­nomic com­pe­tence dam­aged

when in 1992 the pound was ejected from a fixed Euro­pean ex­change rate sys­tem that was the pre­cur­sor to the euro.

One mit­i­gat­ing fac­tor to­day is that Bri­tain’s econ­omy ap­pears on the whole more able to with­stand a sim­i­lar drop in the pound. In 1976, for ex­am­ple, the price of oil had re­cently quadru­pled, send­ing in­fla­tion to around 25 per cent. In­ter­est rates soared to 15 per cent, com­pared to near zero to­day.

If the pound does drop more sharply, the Bank of Eng­land could be the first re­spon­der in any at­tempt to sta­bilise it.

BNY Mel­lon’s Der­rick doubts the govern­ment would re­quest that the cen­tral bank in­ter­vene di­rectly in the cur­rency mar­kets to prop up the pound by buy­ing it and sell­ing other cur­ren­cies. That’s partly be­cause the coun­try’s for­eign ex­change re­serves wouldn’t last for very long in to­day’s multi-tril­lion for­eign ex­change mar­ket.

But the Bank of Eng­land, which is in­de­pen­dent from govern­ment on set­ting in­ter­est rates, could look to tighten mon­e­tary pol­icy, such as by rais­ing in­ter­est rates, if it be­comes con­cerns about in­fla­tion ris­ing. That would likely sup­port the pound — higher rates tend to bol­ster a cur­rency.

There’s a catch. Higher rates would also fur­ther hurt the econ­omy and put pres­sure on house­holds by mak­ing mort­gages more ex­pen­sive.

So while the pound’s drop is un­likely to push the govern­ment to back away from Brexit al­to­gether, it could make it harder for it to ig­nore the eco­nomic pain of break­ing cleanly from the EU sin­gle mar­ket.

“The main chal­lenges (to Brexit) to­day are com­ing from the fi­nan­cial mar­kets,” said Pro­fes­sor Iain Begg of the Lon­don School of Eco­nom­ics.

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