UK exporters are in a welcome “sweet spot” thanks to a boost from the Brexit-hit pound – but this is unlikely to last, according to a senior Bank of England policymaker.
Deputy governor Ben Broadbent said sterling’s plunge since last June’s vote to leave the EU may have hit households by fuelling inflation, but was providing a “boon” for many exporters.
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In a speech at Imperial College in London, he said exporter profits were being given a fillip after the price of their goods rocketed by 12% in sterling terms last year, while they are also still able to trade as before the Brexit vote.
He described the UK as being in a “post-referendum” but “pre-Brexit” era, where the “costs and ease of exporting are unchanged but the returns to it significantly higher”.
“The result is something of a sweet spot for exporters,” Broadbent said, but he warned this would not last.
He said that either Brexit will lead to higher trading costs for exporters, as expected by financial markets, or the outcome will not be as bad as feared, which will push sterling higher.
“Either the currency market is too pessimistic, in which case sterling’s depreciation is likely to be reversed over time. Or it’s not, in which case the costs of exporting will eventually go up.
“Barring some other source of exchange rate weakness, such as a sharp rise in the household saving rate (which would have its own implications for the economy), the sweet spot is unlikely to last indefinitely.”
Broadbent said the fall in the pound gave British firms and overseas groups a “powerful incentive to invest in the UK’s tradable sector”, but this was being held back by fears over the outcome of Brexit.
Businesses were already showing signs of holding back investment due to uncertainty over Brexit negotiations and may cut back further over the year ahead, he added.
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He confirmed that the Bank’s interest rate-setting monetary policy committee (MPC) has “no particular expectation about the forthcoming negotiations”.
“The currency market could turn out to have been too pessimistic,” he added, but said the MPC expects caution as businesses are unwilling to commit to longer-term decisions.
The Bank predicted in its latest set of forecasts that UK annual growth rate would slow to 1.7 per cent in the fourth quarter, down from a surprisingly robust 2 per cent at the end of 2016.
The consensus among external economists are more pessimistic, however, with most predicting a slowdown to 1.2 per cent this year.
Prime Minister Theresa May will formally trigger divorce proceedings with the EU on Wednesday, with Article 50 kicking off an expected two years of talks.