Sun, Feb 17, 2013 - Page 5 News List

Weakening of sterling may be needed to lift UK’s trade

Reuters, LONDON

Sterling may need to weaken further in order to rebalance Britain’s economy, senior Bank of England policymaker Martin Weale said yesterday, as finance ministers met in Moscow to discuss exchange rates.

Britain’s economy has been stagnant for the past two years and efforts to focus more on exports have had little effect, despite a 25 percent depreciation of the country’s currency between 2007 and 2008, Weale said.

“The ... perhaps most natural means of resolving the problem is for the nominal exchange rate to fall,” he said in the text of a speech to be delivered to an economics conference at the University of Warwick later yesterday.

The Bank of England has appeared supportive of sterling weakness before, but Weale’s comments come at a sensitive time.

The pound has fallen almost 5 percent since the start of the year. Finance ministers and central bankers from the G20 group of major economies are currently meeting in Moscow, where unfair currency competition is high on the agenda.

Japan is facing particular scrutiny due to policies that have led to a 20 percent fall in the yen since November as it seeks to reflate its moribund economy.

Britain shares many of Japan’s problems, including extremely weak growth.

Last week Bank of England Governor Mervyn King defended stimulus policies that weakened a country’s currency as a side effect.

Weale did not say Britain should actively pursue such a policy, but he did say King should consider disregarding the inflation impact of future sterling weakness, just as he has recently with the pound’s fall since the start of the year.

“I certainly see that there would be a strong case for treating the effects of any further depreciation similar to that experienced in the last few weeks in the same way,” Weale said.

“But I should stress that this point is quite different from saying that I would be unconcerned about the effects of a sharp depreciation on prospects for inflation,” he said.

Weale said sterling’s nearly 5 percent fall since the start of the year was likely to add around 1 percent to British prices over the next three years.

The central bank revised up its inflation forecasts last week, and now does not expect inflation to fall below its 2 percent target until early 2016, 18 months later than it forecast in November last year.

Weale noted that a weaker currency was not the only way Britain could close its current account deficit, which peaked at 5.2 percent of economic output in the second quarter of last year, the widest since 1989.

The deficit stood at 3.3 percent of output in the three months to September last year.

A delayed surge in exports in response to past currency depreciation, unusually strong financial returns on investments, or a surprise increase in British productivity could all help narrow the deficit.

Weale viewed the latter two options as unlikely, but saw some scope for exports to improve without further sterling weakness, if a more stable global economic outlook improved British companies’ appetite to risk entering foreign markets.

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