LONDON: British exporters are in a post-referendum and pre-Brexit “sweet spot,” according to Bank of England Deputy Governor Ben Broadbent — but it may not last.

While sterling has fallen sharply since the vote to leave the European Union, benefiting UK exporters, the country’s trading rules “are for the time being unchanged,” Broadbent said in a speech at Imperial College in London on Thursday. “The result is that the costs and ease of exports are unchanged but the returns to it significantly higher.”

That positive effect, along with an improved global backdrop, makes for a “powerful incentive” to invest, but there’s also understandable caution among companies related to Brexit, according to Broadbent, the deputy in charge of monetary policy at the central bank.

In his analysis, it’s unlikely that the favourable conditions will last forever.

“Either the currency market is right about the consequences of Brexit, in which case the UK’s trading relationships will become less favourable; or it’s wrong in which case sterling is likely to recover,” Broadbent said.

The economy has performed better than many forecasters, including the BOE, had expected in the wake of the Brexit vote in June. The pound’s 16 per cent fall since then reflects market expectations that there will be some increase in the cost to trade, Broadbent said.

Faster inflation

The depreciation is also forecast to keep inflation above the BOE’s 2 per cent target this year and next. For Broadbent, the negative effects of the depreciation on consumption, from higher import prices, are expected to slightly outweigh its more positive impacts on demand. That will weigh on growth, which the BOE expects to cool through 2017.

UK Prime Minister Theresa May will start two years of divorce talks with European leaders at the end of this month. She’s said that Britain will leave the EU’s single market and customs union in order to restrict immigration, though has also pledged a free-trade agreement with the bloc alongside new deals with countries outside of it.

Since the world economy is doing well, “the fall in sterling provides a powerful incentive to invest in the UK’s tradable sector. All else equal, it would make sense for existing exporters to expand,” Broadbent said. Nevertheless, “all else is not equal” and “no one can be sure about the eventual outcome of the Brexit negotiations,” he said.

The Bank of England kept interest rates unchanged at a record-low 0.25 per cent earlier this month. Kristin Forbes, one of the committee’s more outspoken members, voted to increase the benchmark because of the outlook for above-target inflation. The minutes of the meeting showed that for others, it might not take much more strength in either inflation or growth for them to shift to that view.

It was unclear from Broadbent’s speech which camp of the rate-setting committee he now lies in. Some months after the referendum, he said that the BOE can tolerate high inflation because combating it would come at the expense of jobs and growth.