Interpreting recent movements in sterling

Mark Astley (mark.astley@bankofengland.co.uk), James Smith (james.smith@bankofengland.co.uk) and Darren Pain (darren.pain@bankofengland.co.uk)
Additional contact information
Mark Astley: Bank of England, Postal: Threadneedle Street, London, EC2R 8AH
James Smith: Bank of England, Postal: Threadneedle Street, London, EC2R 8AH
Darren Pain: Bank of England, Postal: Threadneedle Street, London, EC2R 8AH

Bank of England Quarterly Bulletin, 2009, vol. 49, issue 3, 202-214

Abstract: The sterling effective exchange rate has depreciated significantly since the start of the financial market crisis in August 2007. Movements in sterling affect UK monetary policy via their potential impacts on CPI inflation prospects, where it is important to consider the reasons behind the change in the exchange rate. Sterling’s movements potentially reflect a wide range of factors in the United Kingdom and overseas, in both the real economy and in financial markets. Indicative evidence suggests that sterling’s depreciation reflected a combination of perceived changes to UK relative cyclical prospects, the perceived riskiness of UK assets and the apparent need for the UK economy to rebalance, the effects of which may have been amplified by financial market factors. But there is substantial uncertainty about the precise role of each factor.

Date: 2009
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