Thursday 14 December 2017

Brexit surge in UK inflation could stall recovery and hit Irish exports

Theresa May
Theresa May
Colm Kelpie

Colm Kelpie

Inflation in the UK is set to surge to 3.4pc this year, thanks in part to the Brexit-induced weakening of the pound, a leading think tank has forecast.

While that's lower than the 3.7pc forecast given by the National Institute of Economic and Social Research (NIESR) earlier in the year, it is still considerably above the 2pc target as laid down by the Bank of England.

British consumer prices are rising fast, fuelled by higher global energy prices and the pound's plunge following last June's vote to leave the European Union.

And that's bad news for Irish exporters, who have relied on the consumer-led recovery in Britain in recent years.

The UK economy has so far largely shrugged off any projected Brexit impact, but with inflation set to rise above the Bank of England's own 2pc target this year, economists have flagged the potential for consumer confidence to suffer as the weak pound drives up prices.

There was some reprieve for sterling yesterday, which hit a three-week high against the euro ahead of today's Bank of England 'Super Thursday', when it is due to reveal its latest economic outlook and interest rate decision.

But the London-based Centre for Economics and Business Research (CEBR) has already predicted further pain for UK consumers. "Although the pound has most recently gained against other major currencies following the announcement of a snap election in June, it remains well below pre-Brexit vote levels," said Oliver Kolodseike, CEBR senior economist.

"While a weak pound should generally boost exports, it makes imports more expensive.

"It is therefore likely that retailers will have to up their prices in coming months in order to compensate for rising input costs and protect their profit margins which would exert additional pressure on already tight household budgets."

Any softening in consumer demand in the UK could have a knock-on effect in Ireland given the level of exposure here to the UK economy.

The weak pound has already hit firms in the exporting sector, as it makes their products more expensive, and therefore less attractive.

Companies in the food and drink sector here are particularly vulnerable, given the extent of the sector's exposure to the UK market.

The pound has recovered some ground over the last month, as investors remain confident that Theresa May will be able to land a considerable majority in the UK general election on June 8, giving her a decisive mandate going into the Brexit talks.

And it enjoyed another reprieve yesterday, hitting a three-week high versus the euro and climbing towards $1.30 as traders awaited this week's Bank of England inflation report and policy meeting.

The pound rose as much as 0.4pc to $1.2988, still stuck below the $1.30 level, which analysts have said is a key "psychological" level for the currency.

It rose 0.3pc to hit a three-week high of 83.83 pence per euro.

After one BoE policymaker voted for a rate rise in March, investors will be watching the BoE's 'Super Thursday' today for any signs of change in the bank's stance of keeping UK interest rates at record lows.

"The focus now is really on the Bank of England, and maybe that could be an explanation (for sterling strength)," said Richard Falkenhall, currency strategist with SEB, noting policymaker Kristin Forbes's vote for a rate hike in March and the possibility that other members of the Bank's rate-setting committee could follow suit.

"It could also be as simple as there is right now a silent period, so to speak, when it comes to the Brexit negotiations because of the UK election."

The Bank of England's most recent forecasts made in February suggested inflation will rise as high as 2.75pc early next year.

That's lower than the NIESR forecast, but still above the Bank of England's target. (Additional reporting Reuters)

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