Chris Johns: Sterling poised precariously after Brexit vote
Massive moves in currency not a crisis for Bank of England
If Brexit goes badly, we can be confident that sterling will fall further. Photograph: AFP
Sterling has fallen a lot in the wake of the Brexit referendum – by about 11-12 per cent against the euro.
Over the past year the United Kingdom currency has traded in a very wide range: its peak value was about 70p as recently as last November, compared with roughly 86p today. That’s nearly a 23 per cent drop in a matter of months.
The daily and subsequent moves, following the referendum, are the biggest fluctuations of any major currency since the Bretton Woods fixed-exchange-rate system, which was agreed in 1944, broke down in 1971.
These are massive moves: there was a time when all of this would have been called a sterling crisis – something that always causes trouble for Ireland.
It is not a crisis, at least not for the UK, because it’s exactly what the authorities, particularly the Bank of England (BoE), want. They are petrified about the economic consequences of Brexit and are doing all they can to head off trouble. If the price is a lower exchange rate they really could not care less. In fact, they welcome it.
The BoE is the important and only player right now. And it wants sterling low enough to stimulate UK exports, to boost UK inflation and to make UK assets – especially shares and property – cheap enough to entice foreign buying, even if those foreigners are worried about Brexit.
But it’s August, not much has happened following the referendum and those who argue that we have seen the worst of its consequences – such as they are – are fighting a phoney war. Battle will not really commence until the autumn. First up will be the spending part of the UK annual budget process.
Britain has a new chancellor, Philip Hammond, and his autumn statement is going to receive a lot more attention than such statements usually do. Mark Carney, the BoE governor, has said privately and publicly that he is prepared to do more on the monetary front (code for lower interest rates, more money printing and lower sterling) but there are now clear limits to what can practically be achieved.
He has signalled that the BoE believes the ball is now in the court of the UK treasury, who should turn on the spending taps. Lower taxes (VAT seems to be in the frame) and a significant boost to infrastructure spending are on the cards.
But it’s still the same government that has been peddling an austerity mantra for years: the faces have changed, the mood music is in a very different key but it remains to be seen just by how much prime minister Theresa May is prepared to abandon the fiscal principles established by former chancellor George Osborne.
The fact that Osborne is now a backbencher, jettisoned at the earliest opportunity, has led to lots of excited talk that his policies are destined for a similar fate.
Mendacious UK media
Sterling will continue to be knocked around by how all this develops. How much damage will the economy suffer as a result of Brexit? The key insight here is that it is going to takes years to answer that question. It is laughable to see in parts of the mendacious UK media that Brexit’s effects have already been shown to be minor.
One thing we do know about Brexit is that nobody has given much thought to how to achieve it. And the most important thing to emerge from the early Brexit ruminations is that it is going to be very complicated. A bit like trying to unravel a spider’s web without breaking a single thread – broken threads mean economic damage.
We do not yet have any idea when or where this process will start. The machinery of government appears to have been engulfed in a turf war between the three Brexit ministers. The initial omens are not good, hence all the talk about not triggering article 50 of the Lisbon Treaty – which starts the two-year Brexit process – until the end of 2017.
A bit of history is always instructive. In the bad old days it was always considered to be a currency crisis if the Irish pound threatened to reach parity with sterling. To this day, some countries regard the strength of their currency as a national virility symbol; we never had such hang-ups and were always obsessed with keeping our exchange rate as low – as competitive – as we could against our nearest trading partner.
Thankfully, things have changed and we are not so narrowly focused, economically speaking, on the UK. Nevertheless, it remains a significant economic partner, if not still the most significant. It is worth noting that we have traded through the old parity level: if the Irish pound existed today it would be worth roughly 10 per cent more than a pound sterling.
While not causing the crisis of old, that still represents a problem. It threatens to bring the return of cross-Border shopping, with all of the associated problems for retailers in the Republic. And these days, cross-Border shopping is not what it was. I priced a new fancy camera this morning: I can buy it here in Dublin for €1,279 or in the North, in sterling of course, for the equivalent of €1,158. That’s a decent saving, probably making the trip to Belfast worthwhile. And doing a big shop in Sainsbury’s on the way back adds to the incentive.
But I can also get the same camera on Amazon for just over €1,000. And it is a piece of cake to get around Amazon’s “we don’t deliver to Ireland” rules for goods such as cameras. In fact, I can get it delivered to Dublin, thereby saving time and money. I don’t need to cross the Border to do cross-Border shopping. There are plenty of other economic linkages: exporters to the UK are going to suffer, of course. The slowdown in the UK economy will hurt us. Tourism from the UK will be hit.
The oldest cliche in the book is that currency forecasting is a mug’s game. That’s perfectly true. But if Brexit goes badly, we can be confident that sterling will fall further, perhaps by a lot.