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Falling pound is helping support economy, says Bank of England deputy governor

Published 05/10/2016

The deputy governor of the Bank of England said the pound's rapid slide, and a general easing in financial conditions, have supported the economy
The deputy governor of the Bank of England said the pound's rapid slide, and a general easing in financial conditions, have supported the economy

The deputy governor of the Bank of England has said the pound's plunge is helping support UK growth, but warned Brexit uncertainty could cause an "insidious" hit to the economy.

In a speech at the Wall Street Journal in London, Ben Broadbent said there was "little doubt" the economy had performed better than surveys initially suggested after the referendum.

The deputy governor for monetary policy said this was likely thanks to the "underlying momentum in domestic demand", a surprisingly resilient housing market, as well as the post-Brexit vote slump in sterling.

He highlighted that the pound's rapid depreciation, and a general easing in financial conditions, have supported the economy.

Data released on Wednesday showed that Britain's powerhouse service sector continued to recover from a shock contraction after the Brexit vote, with the latest purchasing managers' index signalling new business expanded at its fastest pace since February.

Mr Broadbent explained that currency markets tend to trade on long-term risks and that the pound fell on fears of what the referendum result might mean for the UK's access to global markets.

But given that there have been no immediate changes to the UK's international trading arrangements in the wake of the vote, the drop in sterling is actually proving to be a boon for the British economy, he added.

He said: "Against that backdrop, the fall in the exchange rate will help to support activity, cushioning the impact of greater uncertainty.

"While that was expected, the effect could be coming through faster than we'd anticipated."

His comments came as the pound plummeted to fresh 31-year lows against the dollar, dropping as low as 1.269 versus the greenback at one stage.

Sterling also dropped to five-year lows against the euro, to 1.13.

But Mr Broadbent warned uncertainty still poses an economic threat and could lead to investment being put on hold.

He said: "A lack of clarity about the UK's future trading relationships needn't result in visible, headline-grabbing closures of productive capacity.

"The effect is likely to be more insidious: decisions to expand, that might otherwise have been taken, are delayed."

Mr Broadbent cautioned businesses would likely hold back from "long-lived" investments, such as new buildings, and as trading relationships become more clear, investment in "higher-depreciating items" such as cars and computers will also be affected.

He warned against over-interpreting new economic data, adding the Bank's next quarterly inflation report in November should paint a more accurate picture of post-Brexit vote effects.

Policymakers have indicated another rate cut is likely by the end of the year, to a little above zero, with economists expecting further policy action at the November meeting.

The Bank delivered a bumper post-Brexit stimulus package in August, which included cutting its key interest rate to a record low of 0.25% and extending its quantitative easing programme.

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