What the Bank of England can do

As the Daily Telegraph said in its editorial of August 2nd, the new Governor of the Bank of England must be committed to “making the most of Brexit”, but there are clear limits as to what the Bank can actually do.

The fraction of UK goods exports going to the EU has been falling steadily over the last 20 years to about 43% in 2017/18. But goods imports from the EU to the UK have continued to rise, now approaching double our exports to them, despite the devaluation of the £ by around 20 % since the referendum.

There is a good reason for this which is nothing to do with the Bank of England’s policies. In the experience of this writer over many years, British exporters are wary of quoting their prices in foreign currencies apart from dollars, particularly when it involves haggling in a foreign language. All but the largest corporate firms actually sell to agents who have no particular goal to maximise sales of UK goods. When the £ goes down against the euro they will simply pocket the currency gain. Their customers will see the same euro price and their UK supplier will receive the same £ revenues.

The converse does not apply. With a falling £, UK importers of EU goods come under continuous pressure from their suppliers to keep sales up by lowering margins. Where they really can’t, there is cheap finance to cushion a price rise. If the Bank of England were to order the banks to reduce the supply of unsecured loans, now approaching £4,000 for every adult in the country, British manufacturers would have a better chance of replacing imported goods in the British market.

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