Forex

British pound dips below $1.330 as OECD warns on Brexit effects

After riding high in recent days, the British pound has dipped below the key level of $1.330 against the US dollar Tuesday. The move comes as the OECD warns the impact of Brexit on the economy, could be severe.

By 1200 BST, the British pound was trading at $1.3295. While that’s marginally up from the $1.3289 it hit earlier Tuesday, it’s almost a cent lower than the highs of around $1.3382 it achieved overnight.

UK consumer spending, business investment under pressure

The OECD’s latest global forecast includes details on the global economy as a whole, along with individual reports for each country.

The organisation’s view of the UK was downbeat.

Indeed, the Paris-based think tank’s outlook was gloomier than the OBR’s. The OECD’s November forecast shows it expects GDP growth of just 1.2% for the UK in 2018. It then expects a further slowdown to 1.1% in 2019, when the UK is set to exit the EU.

“Private consumption is projected to remain subdued as higher inflation, pushed up by the past depreciation of sterling, holds back household purchasing power,” the OECD report stated. “The unemployment rate is at a record low, but with slower growth this is unlikely to persist.”

The OBR is currently forecasting GDP expansion of 1.4% in 2018, falling to 1.3% in 2019.

OECD recommends continued accommodative monetary policy

The OECD also said the UK’s fiscal and monetary policy should remain accommodative, to support the economy through the difficult divorce EU proceedings.

“Monetary and fiscal policies need to remain accommodative. Inflation has risen to 3%, but in the absence of wage pressures the central bank should look through the temporary inflationary impact of currency depreciation,” the OECD said.

“The authorities should stand ready to further increase productivity-enhancing measures to support investment if growth weakens significantly ahead of Brexit,” it added in its report.

If the markets think the BOE will adhere to the advice and keeps interest rates lower for longer, then the British pound could easily lose the ground it has regained in recent weeks.

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