Brexit is latest crisis for British pound
Since June, the pound has fallen by nearly a quarter against the American dollar
LONDON— 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 American dollar since the June 23 vote to leave the EU, from around $1.50 (U.S.) to a 31-year low below $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: “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.
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 govern- ment will be willing to endure.
Derrick says that limit could be when the pound hits one-to-one with the euro or the dollar, something that has never occurred with either currency. At present, the pound is worth around $1.23 and 1.12 euros. “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 gotten governments concerned.
Official figures this week showed the annual rate of inflation is running at a near two-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.