Monday September 21, 12:16 AM
Sterling's sustainable FX rate may have fallen-BoE
By Christina Fincher
LONDON, Sept 21 (Reuters) - The pound's long-run sustainable exchange rate may have fallen due to an increased focus on Britain's economic imbalances in the wake of the credit crisis, the Bank of England said
on Monday.
In an article in its Quarterly Bulletin, the BoE says changes to Britain's relative economic outlook, the perceived riskiness of UK assets and the need for the economy to rebalance away from domestic consumption all played a role in sterling's fall over the past two years.
While some factors behind the decline may be temporary, others could be long-lasting, it says.
Since the mid-1990s Britain has consistently run current account deficits averaging around 2 percent of gross domestic product, a situation that was sustainable as long as the deficit was offset by foreign investors' purchases of UK financial assets.
'But the financial crisis may have led overseas investors to reassess their willingness or ability to purchase sterling assets and thereby finance the UK trade deficit,' the BoE article notes.
'As a result, the long-run sustainable real sterling exchange rate, the rate consistent with a balance of UK real aggregate demand and supply and a sustainable external net asset position, may have fallen.'
Although it has recovered some ground since the start of the year, sterling is almost a fifth lower on a trade-weighted basis than in August 2007.
The pound shed nearly 25 percent in the fourth quarter of 2008 alone, its sharpest quarterly fall since the end of the Bretton Woods system of fixed exchange rates in the early 1970s.
FOR A SUMMARY OF OTHER ARTICLES IN THE QUARTERLY BULLETIN, PLEASE CLICK ON
(Reporting by Christina Fincher; Editing by Toby Chopra) Keywords: BRITAIN BOE BULLETIN/STERLING
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