British exporters cautiously optimistic
While sterling has fallen sharply since Brexit vote, country’s trading rules are for now unchanged
British exporters are in a post-referendum and pre-Brexit “sweet spot,” according to Bank of England Deputy Governor Ben Broadbent — but it may not last.
While sterling has fallen sharply since the vote to leave the European Union, benefiting UK exporters, the country’s trading rules “are for the time being unchanged,” Broadbent said in a speech at Imperial College in London yesterday. “The result is that the costs and ease of exports are unchanged but the returns to it significantly higher.”
That positive effect, along with an improved global backdrop, makes for a “powerful incentive” to invest, but there’s also understandable caution among companies related to Brexit, according to Broadbent, the deputy in charge of monetary policy at the central bank.
In his analysis, it’s unlikely that the favourable conditions will last forever.
“Either the currency market is right about the consequences of Brexit, in which case the UK’s trading relationships will become less favourable; or it’s wrong in which case sterling is likely to recover,” Broadbent said.
The economy has performed better than many forecasters, including the BOE, had expected in the wake of the Brexit vote in June.
The pound’s 16 per cent fall since then reflects market expectations that there will be some increase in the cost to trade, Broadbent said.
Faster inflation
The depreciation is also forecast to keep inflation above the BOE’s 2 per cent target this year and next. For Broadbent, the negative effects of the depreciation on consumption, from higher import prices, are expected to slightly outweigh its more positive impacts on demand.
That will weigh on growth, which the BOE expects to cool through 2017.
UK Prime Minister Theresa May will start two years of divorce talks with European leaders at the end of this month. She’s said that Britain will leave the EU’s single market and customs union in order to restrict immigration, though has also pledged a free-trade agreement with the bloc alongside new deals with countries outside of it.