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| Why is the pound falling and what are the implications for Britain? | Why is the pound falling and what are the implications for Britain? |
| (6 months later) | |
| The pound has slumped to a seven-year low against the dollar after David Cameron fired the starting gun on a four-month battle to determine the UK’s future in Europe. Ratings agency Moody’s has also warned that Britain’s strong credit score would be at risk if the public vote to leave the EU. | The pound has slumped to a seven-year low against the dollar after David Cameron fired the starting gun on a four-month battle to determine the UK’s future in Europe. Ratings agency Moody’s has also warned that Britain’s strong credit score would be at risk if the public vote to leave the EU. |
| On financial markets, investors are gearing up for choppy trading between now and the 23 June vote. So why is sterling under pressure? What does it mean for you? And why do we care about the UK’s credit rating? | On financial markets, investors are gearing up for choppy trading between now and the 23 June vote. So why is sterling under pressure? What does it mean for you? And why do we care about the UK’s credit rating? |
| Why is the pound weakening? | Why is the pound weakening? |
| In simple terms, investors are worried about the UK’s economic prospects if it leaves the EU and so they are more reluctant to hold sterling-denominated assets. Even before the referendum outcome is known the economy could suffer, say economists. Businesses do not like uncertainty and so exports, investment and overall growth could all be hampered, they say. Economists are not unanimous about a Brexit being negative for the economy, with some making the point that the UK could end up better off in the long term. But currency markets focus on near-term risks. | In simple terms, investors are worried about the UK’s economic prospects if it leaves the EU and so they are more reluctant to hold sterling-denominated assets. Even before the referendum outcome is known the economy could suffer, say economists. Businesses do not like uncertainty and so exports, investment and overall growth could all be hampered, they say. Economists are not unanimous about a Brexit being negative for the economy, with some making the point that the UK could end up better off in the long term. But currency markets focus on near-term risks. |
| Traders say the pressure on the pound has been intensified by news that the London mayor, Boris Johnson, and his fellow Tory heavyweight justice secretary Michael Gove have joined the leave campaign. Johnson in particular is seen as a big boost for the Brexit camp. Economists at the investment bank Citi have raised the probability of a vote to leave to from between 20%-30% to between 30%-40% since Gove and Johnson came out in favour. | Traders say the pressure on the pound has been intensified by news that the London mayor, Boris Johnson, and his fellow Tory heavyweight justice secretary Michael Gove have joined the leave campaign. Johnson in particular is seen as a big boost for the Brexit camp. Economists at the investment bank Citi have raised the probability of a vote to leave to from between 20%-30% to between 30%-40% since Gove and Johnson came out in favour. |
| There is also the impact on interest rates. The Bank of England was already widely expected to keep borrowing costs at their record low of 0.5% throughout the first half of this year and well beyond. The June referendum has snuffed out any lingering expectation of an imminent rise, given policymakers will want to know the outcome of the vote before raising borrowing costs. | There is also the impact on interest rates. The Bank of England was already widely expected to keep borrowing costs at their record low of 0.5% throughout the first half of this year and well beyond. The June referendum has snuffed out any lingering expectation of an imminent rise, given policymakers will want to know the outcome of the vote before raising borrowing costs. |
| What does a weaker pound mean for consumers? | What does a weaker pound mean for consumers? |
| Those taking overseas holidays will find their trips more expensive. There are now fewer euros or dollars for your pounds. | Those taking overseas holidays will find their trips more expensive. There are now fewer euros or dollars for your pounds. |
| There is also an impact on prices in the UK. The cost of anything that is imported rises when sterling falls. So if the fall in the pound persists, it could be reflected in pricier petrol and in a rise in the cost of some foods and electronic goods. | There is also an impact on prices in the UK. The cost of anything that is imported rises when sterling falls. So if the fall in the pound persists, it could be reflected in pricier petrol and in a rise in the cost of some foods and electronic goods. |
| British expats will also suffer from a weaker pound. The hundreds of thousands of Britons living in Spain and France who depend on salaries or pensions paid in sterling will see their purchasing power fall in their adopted nations. | British expats will also suffer from a weaker pound. The hundreds of thousands of Britons living in Spain and France who depend on salaries or pensions paid in sterling will see their purchasing power fall in their adopted nations. |
| How does a weaker pound affect businesses? | How does a weaker pound affect businesses? |
| For exporters, the drop in sterling makes their goods cheaper overseas and could help lift flagging demand. Until recently, manufacturers had been complaining that a relatively strong pound was hampering their competitiveness and contributing to a slowdown in the factory sector. | For exporters, the drop in sterling makes their goods cheaper overseas and could help lift flagging demand. Until recently, manufacturers had been complaining that a relatively strong pound was hampering their competitiveness and contributing to a slowdown in the factory sector. |
| On the other hand, a weaker pound is bad news for those importing raw materials such as metals. Their costs go up when sterling falls. | On the other hand, a weaker pound is bad news for those importing raw materials such as metals. Their costs go up when sterling falls. |
| Smaller firms will feel the effects of referendum uncertainty most, says Jeremy Cook, chief economist at World First, a currency exchange company: “The uncertainty over the coming months will now place great pressure on businesses, especially SMEs which are exporters and importers, as their balance sheets have far less ability to absorb major currency swings compared with their larger counterparts.” | Smaller firms will feel the effects of referendum uncertainty most, says Jeremy Cook, chief economist at World First, a currency exchange company: “The uncertainty over the coming months will now place great pressure on businesses, especially SMEs which are exporters and importers, as their balance sheets have far less ability to absorb major currency swings compared with their larger counterparts.” |
| Will the pound fall further? | Will the pound fall further? |
| Many currency experts seem to think so. There were a few voices on Monday saying the pound’s Boris-battering was overdone but plenty more are warning that the pound will be pushed lower still over the coming months as traders remain jittery. The mood on markets is not helped by mistrust in opinion polls after their misjudgment over last year’s general election result. | Many currency experts seem to think so. There were a few voices on Monday saying the pound’s Boris-battering was overdone but plenty more are warning that the pound will be pushed lower still over the coming months as traders remain jittery. The mood on markets is not helped by mistrust in opinion polls after their misjudgment over last year’s general election result. |
| Currency strategists at the bank ING say the markets have yet to register the cost of the UK leaving the EU. Recent moves in the pound are more a result of the outlook for interest rates and the global economy, says ING. | Currency strategists at the bank ING say the markets have yet to register the cost of the UK leaving the EU. Recent moves in the pound are more a result of the outlook for interest rates and the global economy, says ING. |
| In a research note entitled “You ain’t seen nothing yet”, the bank comments: “The role of Brexit in steering recent pound price action can be likened to a rollercoaster warming up with some small twists and turns before an inevitable sharp drop.” | In a research note entitled “You ain’t seen nothing yet”, the bank comments: “The role of Brexit in steering recent pound price action can be likened to a rollercoaster warming up with some small twists and turns before an inevitable sharp drop.” |
| The pound hit a seven-year low against the dollar of $1.4057 on Monday. Nicholas Laser-Ebisch, analyst at foreign exchange company Caxton FX, predicts sterling will continue to weaken over the next four months. | The pound hit a seven-year low against the dollar of $1.4057 on Monday. Nicholas Laser-Ebisch, analyst at foreign exchange company Caxton FX, predicts sterling will continue to weaken over the next four months. |
| “Inflation, Bank of England meetings, and other economic indicators will likely not carry as much weight between now and June when it comes to the value of the pound, as the major factor in the back of everyone’s mind will be whether or not the UK will still be an EU country at the end of the summer,” he says. | “Inflation, Bank of England meetings, and other economic indicators will likely not carry as much weight between now and June when it comes to the value of the pound, as the major factor in the back of everyone’s mind will be whether or not the UK will still be an EU country at the end of the summer,” he says. |
| What has happened to the UK’s credit score? | What has happened to the UK’s credit score? |
| Nothing yet. But there have been warnings the UK could be downgraded in the event of a vote to leave the EU. | Nothing yet. But there have been warnings the UK could be downgraded in the event of a vote to leave the EU. |
| Credit ratings agencies assign scores to governments’ creditworthiness around the world to help investors gauge the relative risks of buying bonds issued by those countries. The UK has a strong credit score with the three of the big ratings agencies, but all have warned of potential Brexit costs. | Credit ratings agencies assign scores to governments’ creditworthiness around the world to help investors gauge the relative risks of buying bonds issued by those countries. The UK has a strong credit score with the three of the big ratings agencies, but all have warned of potential Brexit costs. |
| A lower credit rating would mean the UK having to pay more to borrow, which would make it harder for George Osborne to meet his deficit reduction targets. | A lower credit rating would mean the UK having to pay more to borrow, which would make it harder for George Osborne to meet his deficit reduction targets. |
| What are ratings agencies worried about? | What are ratings agencies worried about? |
| They fear that a vote to leave the EU could hurt investment in the UK, dampen exports and thereby hit overall economic growth. | They fear that a vote to leave the EU could hurt investment in the UK, dampen exports and thereby hit overall economic growth. |
| UK is rated Aa1 by Moody’s, one notch below the top triple-A score. The agency says that in the event of a Britain voting to leave the EU it will consider assigning a “negative outlook” to that rating, compared with a “stable” outlook now. Such an outlook would imply a greater chance of downgrading that rating in the future. | UK is rated Aa1 by Moody’s, one notch below the top triple-A score. The agency says that in the event of a Britain voting to leave the EU it will consider assigning a “negative outlook” to that rating, compared with a “stable” outlook now. Such an outlook would imply a greater chance of downgrading that rating in the future. |
| Rival agency Fitch warns that leaving the EU could bring both short-term disruption and long-term risks for the UK. | Rival agency Fitch warns that leaving the EU could bring both short-term disruption and long-term risks for the UK. |
| “Lengthy negotiations and uncertainty over UK firms’ future access to EU markets following a vote to leave in the upcoming referendum on EU membership would weigh on confidence and delay investment decisions,” the agency says in an update. “This would have a short-term economic cost, although the precise impact would be highly uncertain.” | “Lengthy negotiations and uncertainty over UK firms’ future access to EU markets following a vote to leave in the upcoming referendum on EU membership would weigh on confidence and delay investment decisions,” the agency says in an update. “This would have a short-term economic cost, although the precise impact would be highly uncertain.” |
| Standard & Poor’s, the only big ratings agency still giving Britain the top triple-A ranking, has also flagged risks from the referendum to the UK’s financial services sector, its exports, and the wider economy. | Standard & Poor’s, the only big ratings agency still giving Britain the top triple-A ranking, has also flagged risks from the referendum to the UK’s financial services sector, its exports, and the wider economy. |