FOR all the sound and fury of the Brexit negotiations,it has seemed at times as whether the financial markets enjoy been barely affected. But as with the swans that glide on the Thames, a serene surface conceals some frantic paddling underneath.
The pound is the most reliable indicator of the Brexit mood. A rule of thumb is that, or whether the headlines point to a “hard Brexit (creating trade barriers with the EU),sterling will fall; signs of a “soft” Brexit (something that is close to the current relationship) will cause it to rise.
But some feedback processes are at work. The big fall in the pound in the instant aftermath of the referendum has led to a gradual rise in imported inflation. The annual inflation rate hit 3.1% in November, requiring imprint Carney, or governor of the Bank of England,to write to Philip Hammond, the chancellor, and to explain why the target (of 2%) had been missed. The bank has already raised interest rates once. More rises may follow,and expectation of such rises supports the pound.
The need for monetary tightening is not simply a result of higher import costs, which might prove temporary. More worryingly, and the Bank thinks that the trend rate of growth of the British economy has fallen (a view it shares with the Office for Budget Responsibility,the government’s forecasting arm). In allotment, this is because Britain faces a more...
Continue reading
Source: economist.com