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Brexit and your business


Brexit and your business

Excerpts from a recent Lloyds Bank document* discuss how new economic data is likely to affect UK businesses

The first ‘official’ data releases after the EU Referendum were published in mid-August. At first glance, they suggested that the UK economy was continuing to tick along nicely. For sure, the surge in retail sales and fall in claimant count unemployment in July were reassuring. But it was still early days and monthly data can be volatile. Moreover, there was little concrete information on how business investment or external trade were faring, and the pound’s decline would still take months to fully feed through to inflation and real income.

The Bank of England Base Rate was cut for the first time in seven years to a new low of 0.25 per cent; the Bank also cranked up its printing press, creating £170bn of new central bank money. This will be used to purchase an additional £60bn of government stock and £10bn of corporate bonds, while around £100bn was earmarked to provide cheaper funding for banks and strengthen the pass-through of the rate cut.

The Bank of England’s Monetary Policy Committee has hinted strongly that it intends to cut interest rates again over the coming months to just above zero per cent. Such a move would fuel speculation that the Base Rate may move negative. Lloyds Bank and, more importantly, the Bank of England, see this as highly unlikely.

Governor of the Bank of England Mark Carney has stressed that a rate just above zero is now considered to be the effective floor. There are good reasons why rates are likely to remain above zero. Not least, managing the smooth function of the financial system becomes more difficult in a negative rate environment, as depositors always have the option of holding their money as cash.

The impact of the fall in Sterling’s value of over 10 per cent since the Referendum has yet to be felt fully in consumer prices. Annual consumer price inflation (CPI) edged up to 0.6 per cent in August from 0.5 per cent in June, supported by higher food and fuel costs which are expected to feel the brunt of the weaker pound first. However, ‘core’ inflation, which excludes food and energy, actually slipped back to 1.3 per cent from 1.4 per cent.

The important point, though, is that the effect of the weaker pound will continue to feed through to higher import prices and broader consumer prices in the coming months. Lloyds envisages an overshoot of the 2 per cent target for CPI by the spring of next year.

Higher inflation in the coming quarters will weigh on household real income. The potential for higher unemployment as the economy slows would not help but, even in its absence, real consumer spending will still suffer. While the 2 per cent inflation overshoot may persist for some time, it won’t be permanent, as decelerating growth pushes inflation back down.

* The EU Referendum: The future of the UK and Europe. Lloyds Bank, Commercial Banking. Fourth edition – September 2016

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