The pound is likely to remain a benchmark in financial markets, despite the recent German court ruling, according to analysts. The high-profile case, involving a former high-ranking Bank of England official’s allegation that Britain’s monetary policy is to blame for the recent devaluation of the currency, continues to make headlines, even though it was decided against in February. Even so, the fall in the value of the pound was due in part to the British economy and the extent of its dependence on the banking sector.
Speaking at an event in London on Thursday, Martin Selmayr, the president of the European Central Bank (ECB), described the legal issue as a “distraction” for the wider issue of the role of banks in determining the value of the British pound. He said the German court decision “should have no impact on the credibility of our monetary policy” and expressed confidence that the ECB would eventually prevent the risk of a repeat of the last crisis. Mr Selmayr also suggested that the political debate over the future of the pound is likely to slow economic growth this year.
This in turn might mean that the rate of inflation will rise, especially as inflation expectations are being affected by this dispute. This may in turn affect the ability of the Bank of England to control inflation, despite the benefits of its quantitative easing programme. John Longworth, a currency strategist at J.P. Morgan in New York, says that although the current volatility will not affect the underlying fundamentals of the British economy, the debate over the future of the pound is likely to affect future conditions.
“It seems likely that it is the political sensitivity of the issue, which will act as a negative at the moment and help push down the rate of inflation, which we expect to occur this year,” he said. “But from the current perspective, it looks to be possible that the political impasse will not remain a problem for quite some time. Once the political impasse has been resolved, I don’t think that the underlying economic conditions will actually change as such.” However, he says the Bank of England could decide to expand its stimulus programme later this year, if the political barriers are removed.
Sterling today, is trading at around $1.06, following Wednesday’s weak open and stronger trades on Thursday. This suggests that the drop in value of the pound during the recent political crisis has already subsided.
Although there have been reports that the UK might leave the European Union and, consequently, the European Central Bank could print more money to prop up the euro, such a move would hardly have an impact on the competitiveness of the UK economy, according to David Blanchflower, the outgoing chief economist at the Bank of England. He says there is a “reasonable degree of justification” for the Bundesbank to put pressure on the Pound, which could still bring significant improvement to the country’s trade position.
But with the crisis in the Eurozone and the uncertainties created by the continuing downturn in the global economy, it will take time to create a situation where all the economic circumstances are more conducive, according to Mr Blanchflower. In fact, as he put it, the current level of uncertainty in the UK will add to the level of uncertainty in the Eurozone. However, he adds that the political volatility is likely to strengthen the position of the British economy, but he also admits, “There is no guarantee that everything will go well”.
Whether or not the UK leaves the EU remains unclear at this point, but, judging by the reactions of investors in the UK stock market, it is unlikely that this will happen any time soon. In this respect, it seems that the recent events in Germany have been largely ineffectual in weakening the UK economy. On the contrary, Mr Selmayr has gone further to declare that he believes that the current situation in Europe is good for the UK, as the recent European Council has been aimed at boosting confidence and solving a number of problems.
“The reason why this is good for the British economy is because that all the leaders are now talking about putting the Eurozone back together again, which will all contribute to better trade and growth,” he said. While this may be the case, the recent scandals may also force the authorities to further tighten monetary policy, but Mr Selmayr says this could help reinvigorate the British exports.