views

Economic woe hurts sterling

City A.M. Reporter
The POUND&rsquo;S long-run sustainable exchange rate may have fallen due to an increased focus on Britain&rsquo;s economic imbalances in the wake of the credit crisis, the Bank of England (BoE) says in a report published today.<br /><br />In an article in its Quarterly Bulletin, the BoE says changes to Britain&rsquo;s relative economic outlook, the perceived riskiness of UK assets and the need for the economy to rebalance away from domestic consumption all played a role in sterling&rsquo;s fall over the past two years.<br /><br />While some factors behind the decline may be temporary, others could be long-lasting, it says.<br /><br />Since the mid-1990s Britain has consistently run current account deficits averaging around two per cent of GDP, a situation that was sustainable as long as the deficit was offset by foreign investors&rsquo; purchases of UK financial assets.<br /><br />&ldquo;But the financial crisis may have led overseas investors to reassess their willingness or ability to purchase sterling assets and thereby finance the UK trade deficit,&rdquo; the BoE article notes. &ldquo;As a result, the long-run sustainable real sterling exchange rate, the rate consistent with a balance of UK real aggregate demand and supply and a sustainable external net asset position, may have fallen.&rdquo;