Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
UK pound sterling: How low can you go?
23 June, 2016. It’s a day in our history which few Britons will forget. Voters headed to the polling stations, and from 10pm BST, the votes began to be counted. Nigel Farage declared that “it looks like Remain will edge it.” The markets had endured a tumultuous day, but Farage’s sentiments reflected both in terms of investor confidence and bookmakers’ odds, which were suddenly stacked heavily on a Remain victory.
In keeping with this theme was the performance of the UK pound sterling, which, after a rollercoaster year, almost touched $1.50 on the day. It was also at a comfortable €1.31, and all seemed well. But then the rug was pulled from under it.
Since the referendum vote, the currency has sunk to a series of new 31-year lows, and has lost around 18 per cent of its value against the ‘greenback’. It even plunged as low as $1.18 amid a ‘flash crash’ during the recent Conservative Party conference, as the Prime Minister indicated that the UK may leave the single market – or a ‘Hard Brexit’, as it’s been termed. The pound has since stabilised somewhat, but anxiety remains about its future performance.
Will the pound fall further?
Many economists believe that this stabilisation will only serve as brief respite, given that the process of withdrawing from the European Union has yet to actually begin. Certainly currency is one of the more sensitive and volatile economic indicators when it comes to turmoil and uncertainty, and it is this prospect of a Hard Brexit which seems to be the sterling’s greatest Achilles heel.
"The argument which is still presented to us, that the UK and EU will resolve their differences and come to an amicable deal, appears a little surreal,” commented David Bloom, chief strategist at HSBC in a BBC interview recently. "It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation. A lose-lose situation is the inevitable outcome."
Bloom also believes parity with the euro is likely by the end of 2017, an assessment echoed by John Wraith, who is head of UK rates strategy at RBS. And with respect to the other side of the pond, Bank of New York Mellon expect to see the pound slump to around $1.10 within the next 12 months.
The effects on interest rates, inflation and balance of payments
Much of the experts’ gloomy short-term predictions have centred on the direct impact of the Brexit negotiations in the coming months and years. However, there is another important factor at play – monetary policy. Fundamental economic principles dictate that national interest rates – or Bank of England rates, in the case of the UK – have a directly proportional relationship with currency value; other things equal.
In August, the Bank of England made the historic decision to cut base rates to new record lows of 0.25 per cent as a continuation of its quantitative easing programme in a bid to give the economy a boost. However, one consequence of this is further downward pressure on the value of the pound, and with Governor Mark Carney implying that rates could be cut to 0.1 per cent in the near future, it is difficult to know where the floor is in terms of future value.
For a country as heavily dependent on imports as the UK, this will almost certainly lead to inflationary pressures, with the recent ‘Marmite-gate’ between Unilever and Tesco arguably a sign of things to come.
Yet there are of course certain advantages to a weak pound. Exporters benefit hugely, as they are able to trade at more competitive prices. In addition, there is another law in economics which may be of interest. The Marshall-Lerner condition states that ‘for a currency devaluation to lead to an improvement (e.g reduction in deficit) in the current account, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1.’
In the UK, past experience suggests that demand tends to be inelastic in the short run, but elastic in the long run, thus meaning Britain could naturally redress its currently lopsided balance of payments as time goes on.
What can we expect in the years ahead?
Back in early 1985, the pound sank to a low of $1.05. This was against a backdrop of miners’ strikes and race riots in London, coupled with the fact that the dollar itself was particularly strong at that time. President Reagan, in collaboration with the Federal Reserve, had opted for an expansionary fiscal policy to revive the economy. This led to higher long-term interest rates, which, in turn, attracted large inflows of capital.
The independence of the Bank of England has been a hot topic of late, but there is no reason the UK couldn’t go down a similar road, with increased fiscal spending being counter-acted by a more contractionary monetary policy – or at least an end to quantitative easing. And of course, should the Brexit negotiations go a different way to what is expected, and the UK either remain a member of the single market, or retain meaningful access to it, then this could spark a powerful resurgence.
But the reality is that, in the event of a Hard Brexit, inward investment from Europe would likely dip, meaning Britain would need to look to pastures new to fill this void. And for this to happen, it would need the pound to fall further in order to encourage this.
Perhaps at a macroeconomic level, an even greater decline in the pound may well turn out to be a good thing, and many would argue that it is a sensible means for Britain to recalibrate its economy. Yet at a household level, with wage growth remaining stubbornly stagnant, it seems that a continuation of this trend in the pound’s devaluation would lead to a squeeze – at least in the short run anyway.
So, what lies in store for the pound in the years ahead? That, it’s fair to say, is anyone’s guess.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
With the retail sector enduring its fair share of challenges, companies are looking at new ways to attract customers, and drive conversion. In an overcrowded, dog-eat-dog marketplace, with behemoths such as Amazon flexing their muscle, it’s easier said than done.
On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a three-month consultation, is a hefty read of no fewer than 102 pages.
For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
In recent years, we’ve grown accustomed to seeing the UK budget deficit beat expectations each month. Indeed, as recently as January, there was actually a surplus (ie: the level of tax revenue received by the Exchequer exceeded the total spent by the Government on everyday costs such as welfare and public services) – the largest on record for the month of January.
The financial crisis is a bitter memory of what can go wrong when regulators lose control of markets. It seems hard to fathom now, but a little over a decade ago, buyers could acquire mortgages to the tune of 125 per cent of the home’s value (the Northern Rock Together mortgage being one of the most infamous), with only the most lax affordability checks standing in their way.
In the aftermath of the financial crisis back in 2008/09, the Bank of England (BoE) had considerable headroom in terms of monetary policy, and - rightly - it made full use of it.