What a falling pound means

October 12, 2016

Most of us give very little thought to the value of the pound until we’re queuing up at the airport to exchange our hard earned cash into some exotic currency. And even then we’re distracted by the thought of pina coladas and limbo competitions (really? just us?!).

But it’s probably time for us to give it some airtime. The pound is at its lowest point since 1985. Last October it was worth $1.55, at the time of writing it is $1.27. In the months ahead, the fall might start affecting the money in your pocket.

Why has the pound fallen so much?

There are two main reasons. The first is uncertainty in the outlook for the UK economy. With Brexit on the horizon, the Bank of England has slashed its growth forecasts.

Theresa May’s speech on Sunday signalling that controlling immigration was more important than remaining in the EU single market upset investors and led to a further sell off of the pound.

The second reason for the pound’s weakness is interest rates. Since the Brexit decision, the Bank of England has halved the base rate to 0.25%. This has the effect of weakening the currency. The Bank of England has also indicated that further cuts will happen if the economic circumstances make it necessary.

What does the falling pound mean for us?

A weaker pound can be seen as both good and bad, depending on your perspective. If you’re a nationalistic type, you’ll probably be irked that the UK is, in all likelihood, not the fifth largest economy in the world anymore, but the sixth or seventh.

If you like an overseas holiday, it’s bad news. A weaker pound means you’ll get less bang for your buck overseas. But if you’re in the UK tourism trade, the news is good. It’s predicted that more people will stay in the UK and spend their money in British resorts.

It’s bad because it could cause higher inflation, as the cost of imports rises. A weaker pound means UK businesses have to pay more for goods they buy in foreign currencies and that increase will eventually be passed on to us, the end consumer. Our shopping bills may rise and we’ll have less disposable income.

However, if you’re an exporter, the news is more positive. A weaker pound will make your goods more competitive, boosting growth.

How much lower could the pound go?

We could see further falls after the government invokes Article 50 next year which starts the Brexit process. Once we’ve untangled ourselves and become a stand alone island again, we’ll probably face the most uncertain time of all.

The most important issue is whether the fall in the Pound is temporary or sustained. If it’s temporary, most people will only experience short-term fluctuations in prices. However, if the fall is sustained, it will lead to a long-term fall in purchasing power for goods from abroad and could prove painful for many.


This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice. The value of your investments can go down as well as up, so you could get back less than you invested.  

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