Panic over the UK’s EU referendum pushed the pound to a seven-year low on Monday.
Members of the Bank of England’s Monetary Policy Committee are taking questions on it in Parliament on Tuesday and revealing some interesting points.
Firstly, sudden moves in the currency will continue for some time up to the referendum in June.
MPC member Gertjan Vlieghe told lawmakers: “We think the exchange rate is falling because of increased uncertainty about what’s going to happen in the period leading up to, or the period following, the referendum.”
Secondly, how the pound fairs against the dollar is less of a worry for the BOE than what all the uncertainty does to household spending and corporate investment.
It’s a good point — for example, why would you invest in London now if you might lose access to the single European market later down the line?
Here’s Vlieghe again: “It is possible at some point that increased uncertainty from foreign exchange investors also ends up manifesting itself in increased uncertainty by households and businesses which may, or may not, delay or reduce their spending. So far we haven’t seen very clear evidence of that, but we are watching very carefully.”
While big market moves in currencies get the headlines, spending and economic demand are the two things that get the MPC going.
Here’s the MPC’s Martin Weale: “The spending of households and businesses is what actually matters for the MPC and what that means for inflation.”