How does the fall in the value of the pound affect your business?

POSTED: 15th June 2013
IN: Guides

The value of sterling has fallen when measured against most currencies by over five per cent since the start of the year.

The fall in value was due in part to concerns that the UK would lose its AAA credit rating, which it did in April. Many economists believe the Bank of England’s quantitative easing policy, which involves adding artificial money to the economy, has also contributed to sterling’s devaluation.

It meant that £1.00 only brought $1.49 by April, compared to $1.62 in January. Similarly, in January £1.00 would have purchased €1.23 but by mid-March your pound would have only got you €1.14.

How does it affect your business?

If you export goods, then the fall in the value of the pound can be beneficial because it makes British goods cheaper and more attractive to buyers from overseas.

In simple terms, a fall in the value of sterling against other currencies means foreign firms can buy more British goods for the same overall price.

However, this situation is reversed if you import a lot of goods from overseas. A fall in the value of sterling means you get less from your pound, so it costs more to import goods.

Domestic price pressures

The fall in the value of the pound also affects the price of goods and services in the UK by pushing up inflation and raising the cost of buying goods and services from overseas.

Inflation is the measure of how the cost of goods and services rises over time.

Higher inflation raises the price of essential services that your firm cannot avoid, such as the price of fuel and gas and electricity. It erodes the value of the pound in your pocket because you can buy less with it as inflation increases.

Inflation is also used to set salary increases in normal circumstances. However, in the current downturn since 2008, wage increases have been running at much lower than inflation. Currently the average annual salary rise is 0.8 per cent, three times lower than the current rate of inflation which is 2.4 per cent.

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