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Stronger pound could save Britain from cost of living squeeze

Households are feeling the pinch as the weak pound pushes up the cost of imported goods - but the snap election could push sterling up, easing the strain
Households are feeling the pinch as the weak pound pushes up the cost of imported goods - but the snap election could push sterling up, easing the strain

Britain's households could be spared a further blow from higher inflation because Theresa May’s snap election has pushed up the pound, limiting the chance of more rises in the cost of imports.

Economists believe that a bigger Conservative majority could strengthen sterling – or at least stop it falling further – protecting living standards and so holding back one of the main threats to the UK economy this year.

The pound rose by around 1pc on the day the general election was announced, pushing it to almost €1.20 against the euro and $1.28 against the dollar.

Economists expect it will rise further in the coming months.

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“Financial markets have reacted positively to the news, effectively betting that it will remove some of the impediments to a Brexit deal with the EU and, thus, result in a better economic outcome than might otherwise be the case,” said Andrew Goodwin at Oxford Economics.

“Our call that sterling will appreciate to $1.32 by the end of 2017 and $1.35 by end-2018 may turn out to be too conservative.”

Deutsche Bank called the snap vote decision “a game-changer for Brexit and sterling” and cancelled all of its downbeat currency trades as it reversed its long-standing bearish position on the pound and became neutral. However, it still believes the Bank of England will keep interest rates low and so stop the pound rising strongly.

Inflation was very low at below 1pc between late 2014 and late 2016, allowing living standards to rise with the result that consumers have increased spending and boosted the economy.

But last month it hit 2.3pc, stopping households’ spending power from growing and potentially denting economic growth.

On Friday, the Office for National Statistics will publish its first estimate of GDP growth in the first quarter of the year.

Economists expect it will have fallen to 0.4pc, slowing from 0.7pc in the final three months of 2016.

A fall in retail sales in March, revealed in official statistics on Friday, backs up these fears.

“With the retail sector accounting for around 5pc of GDP, the first quarter decline in sales will have shaved close to 0.1 percentage points off GDP growth in that period,” said Martin Beck, senior economic advisor to the EY Item Club.

“Combined with a poor set of macro data from other sectors, growth looks likely to have slowed from 0.7pc in the final quarter of 2016 to around 0.4-0.5pc.

“Looking ahead, the boost to the tradable sector from the weak pound and a buoyant world economy should mitigate weakness on the consumer side. But the dominance of the latter in the economy means that a shift in the source of growth is likely to come at the price of a further slowdown in the pace of expansion.”

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