Economics Weekly by Lloyds TSB

Judging by the fevered headlines surrounding the fall in the UK’s exchange rate over the past couple of weeks, one might imagine that sterling was on the verge of a currency crisis.

Is the fall in sterling good or bad news?

Judging by the fevered headlines surrounding the fall in the UK’s exchange rate over the past couple of weeks, one might imagine that sterling was on the verge of a currency crisis. We argue that it is not. We examine the reasons for the recent decline in the UK currency and assess its prospects going forward. Our conclusion is that, far from being a cause for concern, the depreciation is not only desirable, but essential if the UK is to undergo a successful rebalancing away from domestic demand towards net exports over the coming years. Indeed, judging by the comments made by Bank of England Governor Mervyn King last week, and a recent article published in its latest Quarterly Bulletin, this view appears to be shared by the Bank of England.

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