- Firstly, UK inflation is low and is likely to fall.
- The UK has a reasonably large current account deficit (about 3.5% of GDP) but it is not unmanageable. The UK doesn't have a balance of payments crisis
The Pound is steadily falling because:
- Previously it was punching above its weight - you could say it was overvalued at least against the dollar. So its current decline is in a way returning to 1996 levels when the Pound was very weak against the D-Mark
- Large Cuts in UK interest rates which make it less attractive to save in UK
- UK recession is deeper than anywhere else so interest rates could keep falling to 0%.
- Speculation - Investors are making alot of money out of the falling pound; with shares in the doldrums betting on exchange rates is one of the few ways to try and make a decent return. There is an element that the weakness of the pound is feeding on itself.
True, the UK recession is deeper than elsewhere, but rates in Europe are likely to keep falling as Germany and France go deeper into recession as well.
People point to high levels of government borrowing in the UK. But, high levels of borrowing only have a limited impact on the exchange rate. Furthermore, UK public sector debt is not any worse than other OECD economies.
Is it a problem that the Pound is falling?
Not really. The usual inflationary impact of a falling exchange rate is muted because of the recession. It will provide some help to our beleaguered exporters.