16 October 2016

フィナンシャルタイムズ紙：英国のEU（欧州連合）離脱はポンド危機を引き起こすのか

The decline in sterling raises domestic inflation, which is the main route for the necessary decline in living standards to be imposed on the population. It also repairs the loss in the UK’s international competitiveness. The IMF has IMF Country Report on the UK">estimated that a drop of 5-15 per cent in sterling should be sufficient to do the job.

Sterling is now 16 per cent lower than it was on referendum night. What appeared to be an orderly decline in the exchange rate has shown signs of getting out of hand in the wake of the Prime Minister’s speech at Conservative Party conference, in which she appeared to favour a hard Brexit.

This could be a negotiating stance, or it could be a genuine political preference: we will not find out until mid 2019. But markets are saying that a hard Brexit will require a larger drop in sterling to restore equilibrium. This will result in higher inflation than previously contemplated.

Separately, the Governor of the Bank of England appears more willing than before to accept a “temporary” rise in inflation, while keeping domestic interest rates close to zero. The combination of hard Brexit with a super-easy central bank is not a recipe for a strong currency.

There has been some loose talk that this loss of confidence could develop into something really nasty – a sterling crisis. Although the UK has been a serial offender in this regard since leaving the Gold Standard in 1931, I doubt it will happen this time.

Even mentioning the term “sterling crisis” will strike many readers as alarmist. Past crises have usually occurred because Britain was part of a fixed exchange rate system (the Gold Standard, Bretton Woods or the ERM) that was in danger of breaking apart.

But the 1976 crisis, one of the most severe of them all, occurred when sterling was a floating currency. That crisis was severe not because it involved the break up of a rigid exchange rate mechanism, but because it threatened extremely high inflation in the UK. The credibility of fiscal and monetary policy was brought into doubt by the collapsing currency, and vice versa.

Inflation is not in the same ball park as it was in 1976. Although 10 year gilt yields have started to rise, they remain at the extraordinarily low level of 1.1 per cent. The bond market continues to treat the UK as a typical developed economy, where deflation is at least as worrying as runaway inflation in the medium term. Japan conducted a major devaluation in 2013-14 without triggering inflation, and the UK should be able to follow suit.

It would take a major UK policy mistake to change this outcome. But the problem is that Brexit has made a policy mistake far more likely, because it involves inflationary and deflationary shocks to the economy at the same time. Brexit has triggered:

• An adverse supply side shock. The reduction in trade and openness caused by Brexit is likely to reduce UK productivity and output in the long term. The Treasury has estimated these losses to be equal to 3.8-7.5 per cent of GDP over 15 years, depending on the “hardness” of the Brexit deal. The IMF broadly agrees with these figures.
• An adverse demand side shock. Uncertainty across the entire economy, and delayed investment spending by the corporate sector, may reduce GDP in the near term by up to 2.5 per cent (according to the Bank of England), though none of this appears to have happened so far.
• A rise in the risk premium required to hold sterling. The medium term equilibrium for the exchange rate has declined, UK interest rates have fallen, and investors have deemed sterling a more risky asset than before. An exchange rate around $/£ 1.20-1.30 may be enough to reflect the new fundamentals for the economy, but a loss of confidence could take the currency much lower in an “overshooting” scenario.

The key question for policy is whether the intended easing in both fiscal and monetary policy remains appropriate at a time when sterling has weakened unexpectedly and inflation expectations have risen, especially since the economy remains fairly robust, with the labour market close to full employment.

The new Chancellor’s approach to fiscal policy will not become clear until the Autumn Statement on 23 November. Mr Hammond has hinted that the 2020 target date for a balanced budget will be abandoned, and it seems probable that the path for the budget deficit will be increased substantially (perhaps by 2 per cent of GDP per annum) compared to pre-Brexit plans. Some of this may reflect the automatic effect of lower GDP on the budget deficit, but some will represent a genuine easing in the fiscal stance.

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