British pound is undervalued by about 15%, of which 7% are due to depreciation after the Brexit referendum, according to the latest report of S&P Global. However, the authors of the report warn that the currency is likely to remain at its current levels for some time. The current devaluation of the British pound can be attributed to the expectations that the financial sector will weigh on the British economy as a result of Brexit, as well as actions of the Bank of England to mitigate the short-term negative impact on economic growth.
Since June, the exchange rate passed through high volatility. In early October GBP was down by 6% on speculation about Hard Brexit, at which the greater control over immigration would be at the expense of London contacts with the European single market. Since the beginning of the year the British pound has depreciated nearly 17% against the USD. However, according to S&P the currency is somewhat adapted to fluctuations in the nominal exchange rate.
“Since 1975 the GBP has experienced eight major periods of decline. On average these episodes last about six months, as there have been cases of depreciation of 13.8% against the USD and 18% against the EUR. The biggest collapse of the currency against the USD was in 1981 and then in 1982”, says the report of S&P economists.
The report points out that between 2000 and 2007, the growing importance of the financial industry has increased exchange rate above its equilibrium level, whether it is measured by purchasing power parity or current accounts. The purchasing power parity occurs when the exchange rate of the currencies of two countries is equal to the ratio between the prices in these two countries.
The British pound remains under pressure despite the stimulus from the beginning of week, when the central bank governor Mark Carney said that he would remain at this position until June 2019, which is one year longer than was originally planned. The increase was about 0.5%, but this growth was contained on the eve of the meeting of the BoE.
Moreover, the British economy may face a lower credit rating if it fails to negotiate access to the single European market, warns agency Moody’s. Currently the rating of UK AA1.