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The vote to leave the EU led to a big drop in sterling’s exchange rate. One consequence is a rise in import prices and a squeeze on households’ real income. We may already be seeing the impact of that squeeze on retail spending, which in real terms fell quite sharply around the turn of the year.
While it’s hit the income of households, however, the depreciation has come as a boon for many exporters. In sterling terms goods export prices rose 12% through the course of last year. This will significantly have boosted exporters’ profitability and with it the incentive to invest in extra capacity.
In general, it’s not really right – not enough at least – to think about the impact of a change in the exchange rate in isolation. Asset prices are volatile in the short run, sometimes inexplicably so. But over time they tend to move for a reason. They’re driven by deeper things that can have important effects of their own. To get the full picture you need to take both into account, not just the partial impact of a change in the exchange rate but those of its underlying drivers as well.
Read the full speech
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