On balance, I’d vote for a rate rise and a stronger pound

Since Article 50 was triggered last week, City traders have been avidly watching the fluctuations of the pound. Analysts at Barclays, Nomura and Citigroup think sterling is undervalued against the euro and the dollar, and due for a rebound, having dived in the market tizzy that followed last June’s referendum and kept its head down through the phoney war of the past nine months. As ambiguity over Brexit terms begins to recede, says the City, it’s time for the pound to perk up.

Well, maybe — as I’m often moved to observe in relation to bald economic statements. Let’s take a closer look. The sudden fall last summer boosted UK exports and tourism, but was by no means the only factor that kept the economy buoyant after the Brexit shock: consumers shrugged off fear and returned to spending as though nothing had changed, encouraging employers to go on investing and creating jobs. But the effect of the cheap pound on import prices is also the prime cause of a jump in inflation to 2.3 per cent, squeezing household incomes (see below) and carrying the political peril of hurting those on low incomes the most.

Latest data for manufacturing and exports shows growth still positive but slowing, which argues for keeping a competitive pound even if it causes domestic pain. A rise from 1.17 to 1.30 against the euro and from 1.25 to 1.40 against the dollar would knock exports and dent growth but douse inflation. It could happen of its own accord if that’s the way markets bet, but it’s much more likely to happen if the Bank of England finally starts to raise interest rates, a move many pundits feel is overdue. It’s a tough choice, but that’s the way I’d go.