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How low can it go
- 2 страниц
- 2017 год
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How low can it go?
Already at a ...-year low, the pound is vulnerable to further depreciation.
THE day after the EU referendum, sterling fell by .. against the dollar in a frenetic day of trading. Since then the pound’s drift has been more sedate, but no less persistent: on July 6th it reached ..., the lowest level in three decades. It would be no surprise if the pound continued to slide.
Investors have sold sterling assets in the expectation that the Bank of England will loosen monetary policy to cope with the looming economic slowdown. Indeed, on July 5th the bank reduced capital requirements for banks, in a bid to stave off a credit crunch. In principle this will create ... billion (... billion) of extra lending capacity. At the next meeting of its monetary-policy committee, on July 14th, the bank may also cut interest rates below their current level of ..., or implement extra quantitative easing.
Though its value has fallen relative to the dollar, by other measures the pound is hardly cheap. The “trade-weighted” sterling index, which is adjusted for the currencies of Britain’s other trading partners, is still about ... higher than it was at the peak of the financial crisis (see chart). The euro has also been knocked in the post-referendum panic, meaning that sterling’s losses against the currency of its biggest trading partner have been trimmed.
Political ructions following the Brexit vote may put further pressure on the pound. In the run-up to the referendum, traders talked of a “Brexit premium”. Sterling was weaker against the dollar than the expected path of interest rates in Britain and America implied. But since the referendum the Brexit premium has looked relatively stable, even though a messy divorce from the EU now seems to be on the cards. If investors come to fear a loss of Britain’s political stability, sterling could fall still further.
However, what may seem like Britain’s biggest vulnerability may turn out not to be so. The current-account deficit is now at an all-time high of ... of GDP. At its simplest, this measures Britain’s net borrowing from abroad. Were foreigners to pull money from Britain en masse, the pound would plunge. Happily, though, the risk of this is smaller than it was a few years ago. The liabilities Britain has taken on to finance its cumulative current-account deficits are largely made up of equity and long-term debt. Such capital is stickier than deposits or short-term debt, which can vanish in a trice. Still, foreign inflows into areas like London property may tail off (see article).
Capital Economics, a consultancy, reckons that the pound will end up at around .... If so, moans about the cost of imported gadgets or foreign holidays will only get louder. Unfortunately, the Brexiteers’ retort that a weak pound is good news for exporters and thus the economy is unconvincing. The experience of ..., when exports barely responded following sterling’s depreciation, is telling: the hit to confidence and credit from Brexit is likely to hurt exporters more than a weak pound helps them.
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