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Britons already feeling pinch from Brexit

LONDON: Union flags fly as banners across a street in central London yesterday. EU leaders attempted to rescue the European project and Prime Minister David Cameron sought to calm fears over Britain’s vote to leave the bloc as rating agencies downgraded the country. — AP
LONDON: Union flags fly as banners across a street in central London yesterday. EU leaders attempted to rescue the European project and Prime Minister David Cameron sought to calm fears over Britain’s vote to leave the bloc as rating agencies downgraded the country. — AP

LONDON: Holidays abroad are already more expensive and supermarket food prices will rise-Britons are feeling the pinch from Brexit, analysts say. Britain voted last week to quit the European Union, despite the government’s warnings of a potential recession and hefty price hikes for consumers. Since the shock vote outcome, perhaps the most dramatic fallout has been the collapse in the pound.

The value of sterling has tumbled since Friday by up to 12.6 percent against the dollar and by up to 10.2 percent against the European single currency. For Britons planning travelling abroad for their summer holidays, their slumping currency means that the pound in their pocket has lost purchasing power. “The fall in value of the pound will have an immediate impact on holidaymakers and their spending power overseas,” the Association of British Travel Agents said.

Ahead of the vote outcome, Britons had flocked early last week to foreign currency dealerships to sell their pounds in case of a currency crash. In chaotic trade on Monday, the unit tanked to $1.3121 — its weakest level since September 1985 — while it forged two-year lows versus the euro.

The plunging pound also means imported goods like fresh produce will cost more, pushing consumer price inflation higher, experts warn. “The prices of fresh produce will definitely go up as much of this is sourced from the EU,” said analysts at Kantar research consultancy.
“In the case of (British supermarket giant) Tesco, for example, almost 50 percent of butter and cheese consumed in the UK comes from milk sourced from EU markets.”

Consumers will pay more
Anastasia Alieva, head of fresh food research at the Euromonitor consultancy, added rising prices would curb consumers’ spending power. “Overall, the weakness of the pound is likely to generate price increases for many food products which will have a negative impact on disposable income,” Alieva wrote in a note.

She added: “Those who source their produce from the UK will be in a stronger position than those sourcing from outside the UK. “Prices of fish and seafood imported from the EU are set to rise, but it is unclear to what extent.”

Distributors-whose margins have already been squeezed by supermarket price wars and Britain’s minimum wage-will meanwhile be forced to pass on their increased costs.

“Brexit isn’t a good thing for the UK consumer,” concluded Bernstein analyst Bruno Monteyne. “Consumers will end up paying for the extra inflation,” he added. At the height of the referendum battle, the government warned an EU exit would cost the average household £4,300 ($5,700, 5,200 euros) per year by 2030, in claims rebutted by “Leave” supporters.

The price forecast was almost impossible to verify because it remains unclear what the future relationship would be between Britain and the EU, nor the extent of the economic shock from Brexit. “Leave” campaigners argue Britain could negotiate deals to access the single market similar to those in place for like non-members Norway and Switzerland. However, the assertion is shrouded in uncertainty after European Commission chief Jean-Claude Juncker declared that Brexit would “not be amicable”. Dutch food and cosmetics giant Unilever has already forecast higher prices for its products like Magnum ice cream.

“If you would have trade restrictions-because undoubtedly if the UK will leave, the conditions will not be as good as if they stay in-you will have import duties on dairy,” said Unilever chief executive Paul Polman earlier this month. “So the price of dairy products will go up (and) the price of ice cream will go up, and ultimately the consumer will pay the price for that.”

BoE intervention
British banks yesterday tapped the Bank of England for £3.1 billion ($4.1 billion, 3.7 billion euros) to help bolster their balance sheets in the wake of the shock Brexit vote. The central bank, which announced the news in a statement, has now injected more than £9.0 billion into lenders in three funding auctions aimed at calming markets around the June 23 referendum date.

It is the first time the BoE has ever held more than one such auction in a month. In the “Indexed Long-Term Repo” operations, banks, building societies and broker-dealers can offer assets such as mortgage loans to the Bank of England in return for cash, which they repay six months later.

This helps banks and the wider financial industry to keep ticking over during periods of market turbulence or when there might be a risk of a “credit crunch”-a reduction in the availability of loans which can worsen an economic downturn. Similar emergency lending provided in 2008 during the global financial crisis, and the Bank of England currently holds one Indexed Long-Term Repo a month.

Separately, BoE governor Mark Carney had pledged last Friday to pump at least £250 billion into money markets if needed to prevent a credit crunch amid heightened uncertainty following Britain’s vote to leave the European Union. Banks in the UK already have a combined £600 billion in liquidity on their balance sheets, helping shield the sector from a repeat of the credit crunch seen at the height of the financial crisis. -AFP

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