UK’s Rises and Falls from Brexit

Data sourced from The World Bank (modeled ILO estimate)

Managing post-Brexit economic challenges is the priority.

Perhaps such a scenario was one that was predicted.  That prices will rise, inflation will surface, and that the Pound will depreciate,  was what was well expected after the Referendum. Post Brexit, inflation in the UK reached a 22-month high, to 0.6 percent. A depreciating currency and the resultant inflation set the stage for decreasing revenues for firms in the UK, and consequent reduction in purchasing power in the hands of consumers. The extant scenario in the UK is already pointing towards a post-Brexit effect. The slowdown of the housing market, a further cut in costs by construction firms, and similar effects suggest a decrease in supply capacity in the economy, coupled with a weaker demand. Such a gap in the demand-supply chain necessitates measures not only to fill up this gap, but also to control inflation.

While some analysis claims that the UK may be benefitting from the Referendum, the economy swimming ashore from a long deflationary period, some more analysis says that it may be hurting the economy. Some of the several determinant factors to be considered are production, inflation, and employment (in the medium-term), lower purchasing power, decreased spending, decreased borrowing capacities of consumers, and the like.

Keeping the real interest rate low for a longer period may be one way to avoid the current economic slack. In case of economies that experience such diverse conditions, expectations of future inflation, leading to current rises in prices, thus keeping the current real interest rate low, in order to alleviate the economy sooner, is generally the protocol.  Monetary easing may be an answer to this temporary inflation scenario; measures to control such inflation become nevertheless necessary in order to maintain balance in the labor market, and keep up consumers’ confidence. A rate cut that is consistent with the currently depreciating Pound seems a treaded path. There are more arguments in favour of keeping inflation at bay. Curtailing unemployment rates and maintaining the employment to population ratio is one of them. Preserving liquidity in the economy, and avoiding intermediate slowdown is the biggest challenge.

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