LONDON/BENGALURU Sterling’s near 20 percent plunge following Britain’s vote in June to leave the European Union has brought the currency to the ideal rate for the UK economy, according to a Reuters poll of economists taken in the past few days.
That plunge, however, has already begun to stoke inflation, posing a challenge for Britons and the Bank of England alike via more expensive imports, with prices of some of Britain’s best-known items set to rise in the shops.
The poll also found the BoE, which targets inflation at 2 percent, would stomach it rising from 1 percent currently to 3.5 percent next year before considering changing the neutral stance it only just shifted to from an easing bias last week.
The range of responses from economists on the central bank’s tolerance level for inflation was wide, from 3 to 6 percent. Two-thirds of respondents in the Nov 4-7 poll were based in the United Kingdom.
Several of the usual participants in Reuters polls declined to give a view on the ideal exchange rate, with some saying there wasn’t one. Others said how volatile the currency had become was more of an issue than the actual exchange rate.
“There has been evidence that the drop in sterling has helped exporters and manufacturing industries but the uncertainties created by the volatility can negate some of the good effects,” said Jane Foley at Rabobank.
The pound GBP= traded at $1.24 on Monday, matching the median ideal exchange rate given in the poll. That is well above a three-decade low of $1.145 struck in a flash crash a month ago, but far below $1.50 around the June 23 referendum.
Views on the ideal exchange rate, which is weak enough to support exports on the one hand but not too low to stoke an uncontrollable rise in inflation, ranged from $1.15 to $1.35.
Against the euro EURGBP=, which matters more for trade as nearly half of Britain’s exports to go to the EU, the median ideal rate was 88 pence to the euro, slightly above where it was trading on Monday. Forecasts ranged from 83 to 95 pence.
Last week, sterling rallied almost 3 percent against the dollar but only a bit more than 1 percent against the euro after a British court ruled the government needs parliamentary approval to formally start the process of leaving the EU.
The better performance against the dollar reflected a sinking U.S. currency on the view Republican candidate Donald Trump had a better chance of taking the presidency in the election on Tuesday. That fall in the dollar came alongside the longest losing streak for Wall Street stocks in 35 years.
But the pound slid once again on Monday against the dollar as prospects for Democratic candidate Hillary Clinton appeared to improve.
Early last week, the Reuters monthly survey of more than 60 dealers found the pound would likely fall to $1.15 after the formal step giving intention to leave the EU, triggering Article 50 of the Lisbon Treaty, was triggered.
BEATING EXPECTATIONS SO FAR
Britain’s economy has so far performed much better than was almost unanimously predicted by economists soon after the referendum and the BoE raised its forecasts for 2017 growth and inflation sharply last week.
GDP expanded a stronger-than-expected 0.5 percent last quarter, tempering fears of an immediate Brexit vote shock, but that pace is predicted to weaken to 0.1 percent this quarter, a Reuters poll found last month.
Yet despite a string of upbeat data and a sharp upward revision by the BoE last week to its near-term view, only 22 of the 41 respondents who answered a separate question said they were considering revising up their Q4 growth forecast.
Prime Minister Theresa May has said she intends to start the formal two-year countdown by end-March but there have been few clues as to what form those talks will take.
Many think May is leaning towards a “hard Brexit” – giving up on trying to maintain access to the EU single market in favour of imposing controls on immigration, a move which would hinder trade and further hurt sterling.
“Sterling will be volatile and buffeted around by political moves related to whether we’re going to get a hard or a soft Brexit,” Foley said.
Some foreign exchange analysts noted on Monday that despite the rally last week, traders remain heavily short the pound which could lead to further rallies where traders are forced to buy back pounds they have sold to cover their positions.
“However, as Brexit related uncertainty should continue it seems unlikely that buying interest will rise more considerably from these levels,” wrote Valentin Marinov, Head of G10 FX Strategy at CA-CIB, in a note to clients early on Monday.
(Polling by Kailash Bathija; Editing by Ross Finley and Richard Balmforth)