One of the most visible results of the Brexit vote has been a massive fall in the value of the pound against other currencies. Starting 2016 at just over US$1.45, the pound reached a high of $1.4877 on 23rd June before tumbling almost overnight to below $1.30.
Recent comments by Theresa May that suggest Brexit negotiations may prioritise immigration control over single market access have sent the pound tumbling even further. It now stands at $1.2914, and economists are predicting further falls.
So what does this actually mean for you and me?
A weak pound tends to boost inflation, since it’s more expensive to import goods. Inflation has been at record lows in recent years, but it’s inching up now. From 0.2% at the beginning of the year, the latest figure is 1.2%, and some economists are forecasting that it could reach as high as 4%.
This will push up prices of food and other everyday goods, since either the goods themselves or the raw materials are frequently important, and fuel prices will probably continue to rise as well. The effects of inflation have been balanced somewhat by fierce price-cutting battles between retailers, but this is unlikely to last.
One of the most immediate effects of a weak pound is that holidays abroad become more expensive. You’ll get fewer dollars, euros or other currency when you book your hotel or change your sterling, so the whole cost will go up considerably.
This is likely to lead to a rise in “staycations”, with more people taking their holiday in the UK. Ultimately, this should be good for the economy, since holidaymakers will be spending their money in British tourist destinations, rather than taking it abroad.
Benefits of a Weak Pound
It’s not all gloom. Besides the staycation effect, a weak pound is good for exports and foreign investment, since UK prices have suddenly become more attractive.
More immediately, the Bank of England has been supporting the pound by reducing interest rates from already low levels. If, as is likely, these are passed on to the consumer, it will mean lower rates for a variety of loans, from mortgages to payday loans.
In the short term, both the fall in the pound and the rise in inflation are likely to continue. In the longer term, the outcome will depend largely on what the financial markets make of the Brexit negotiations and whatever new trade deals can be agreed.
For advice on how this may affect your loans, feel free to contact us.