Pound Will Cushion U.K. From Brexit Shock, BOE’s Broadbent Says

  • Flexible currency is important shock absorber, Broadbent says
  • Sees inflation rate rising ‘somewhat’ above 2% target

Brexit Hits Main Street as U.K. Feels Pound's Pain

Bank of England Deputy Governor Ben Broadbent said the pound’s slump since the U.K. vote to quit the European Union will help the economy overcome shocks from the decision.

Sterling is down about 18 percent since the vote on June 23 and is the worst performer this year among a basket of major currencies. Its rapid decline has prompted commentary from a number of BOE policy makers in the past week, including Governor Mark Carney, who said he’s not indifferent to its level.

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Asked on BBC radio if the BOE would intervene if the pound got too weak, Broadbent said the flexibility of the exchange rate is an important cushion for the economy.

“Having a flexible currency is an extremely important thing, especially in an environment when your economy is facing a shock that’s different from your trading partners,” he said in an interview broadcast Monday. “In the shape of the referendum, we’ve had exactly one of those shocks. Allowing the currency to react to that is a very important shock absorber.”

Sterling slid 0.3 percent against the dollar Monday to $1.2159 at 9:06 a.m. London time and U.K. government bonds fell, pushing the 10-year yield to the highest since Britain’s Brexit vote, fueled by rising inflation expectations.

The weaker pound is pushing up import costs and will feed through to consumer prices over the coming months. Data on Tuesday will probably show inflation accelerated to 0.9 percent. That’s below the BOE’s 2 percent target but would represent the fastest rate since 2014.

Broadbent said that inflation will probably rise “somewhat” above the goal in the next few years but didn’t indicate any concern about this. Fellow policy maker Kristin Forbes, who opposed some of the BOE’s August stimulus measures in response to the Brexit vote, has warned of a potentially “sharp” overshoot of the target.

“If we had wanted to ensure that we set policy -- the level of interest rates -- in such a way as to ensure there was no chance of it rising above target, then we would have had to have set tighter policy,” Broadbent said. “That would have meant lower economic growth and that would have increased the chances of unemployment going up.”

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