The devaluation of sterling since the EU referendum could prompt an increase in business investment if exporters look through trade uncertainty, according to a deputy governor of the Bank of England.
Ben Broadbent, one of the most influential members of the Bank’s Monetary Policy Committee (MPC), said the depreciation had created “something of a sweet spot for exporters.”
While there have been no negative impacts on trade, prices of British exporters’ products have become more attractive. At the same time output is near potential, he said, meaning exporters have much to gain from investing.
Broadbent said: “Given the existing capacity constraints, the fall in sterling provides a powerful incentive to invest in the UK’s tradable sector.”
However, he also cautioned longer-term investment is probably being harmed by the uncertainty around the future trading arrangements with the EU, the UK’s biggest export destination.
He said: “The uncertainties involved in longer-term decisions could temper the usually positive response of business spending to depreciations in the exchange rate.”
Broadbent said the longer-term prospects for business investment, which is intimately linked to productivity and growth, would depend on whether companies mirror consumers, who have not tempered their spending since the referendum.
The Bank of England revised up its projections of business investment in February, after much stronger than expected consumer spending at the end of last year actually caused the economy to accelerate.
However, its latest forecasts show business investment will fall by around 0.25 per cent per quarter in the first nine months of this year, albeit around half a percentage point stronger than predicted in November.
The strong performance of the UK consumer has contradicted the view of financial markets. Broadbent interpreted the depreciation of sterling as a clear “negative” stance on the probable effects of Brexit.
However, he also noted a good deal with the EU during negotiations could lead to sterling appreciation “if the market has misjudged the risks – if the UK emerges from this as open an economy as it is today, or more so".