Market News

BY  Irina Anghel, Bloomberg News

(Bloomberg) -- The tumbling pound is forcing British businesses to raise prices, amplifying pressure from surging energy bills, higher raw material costs and a tight labor market.

Importers are among the worst-hit. Almost half of the food on supermarket shelves comes from abroad, according to the British Retail Consortium, and it could become more expensive to source because of the currency’s decline. It’s even worse for non-food sectors, where imported goods sometimes make up an even greater portion of sales.

“Any rapid drop in the pound, while helping exporters, will be alarming for all businesses because of the sense of instability it creates,” said Kitty Ussher, chief economist at the Institute of Directors.

The pound’s plunge to an all-time low came in the wake of the new government’s tax-cutting budget, which is intended to drive growth. Yet further price increases could pressure households and businesses already squeezed by high inflation and spiking borrowing costs.

For UK-based companies, the effects are mixed. Travel and tourism businesses could get a boost from a weaker pound, with Americans flocking to Britain after two years of Covid-related restrictions.

Higher Rates

For multinational firms based in the UK, a weaker pound also means earnings from overseas operations translate into more of the British currency. 

Yet any positive effect may be offset by higher lending costs if the Bank of England raises interest rates further to try to stem the slide. The BOE said Monday that it’ll assess sterling’s drop at its next scheduled meeting and won’t hesitate to change rates as much as needed.

The risk of debt defaults for British supermarkets surged as investors reacted to the market swings, with insurance on bonds of Asda Group Ltd. and Iceland Foods Ltd. -- used to protect investors against non-payment -- jumped to signal a 52% and 76% chance of a default within five years respectively. 

EasyJet Plc said the weaker pound will inflate its costs, though the UK airline’s hedging positions on jet fuel and currency fluctuations should provide some protection. 

For smaller businesses based in the UK that rely on imports, the currency’s plunge could be more problematic.

“It’s a nightmare,” said Roy Kendall, managing director at Top of the Range, a Yorkshire-based distributor of sportswear, including to the military, speaking about spiking import costs across the board. 

His business is partly insulated from the sharp devaluation thanks to a years-long strategy of securing more of the stock in advance. Still, Kendall sees the falling pound affecting cash flow, costs and wages in the future.

UK Shift

Top of the Range is also looking to shift more of its business to UK manufacturers to reduce their exposure to goods priced in foreign currencies. While around 10% of its products come from British suppliers, Kendall aims to triple that share by the end of this year. 

A rapidly weakening pound also hits people like consultants who have to adjust their rates to serve clients all over the world. Take Howard Turner, currently based on the French-Spanish border, who designs recording studios for individuals and institutions in the UK and in Europe. He’s looking to revise his rate card in the coming days for the first time since the aftermath of the Brexit vote in 2017, when he assumed a conversion rate around 1.25 euros per pound. Late Monday the rate was 1.11. 

The fall in the pound now means those prices are far lower for British clients, compared with those who pay in euros. If the pound reaches parity with the euro, he might have to raise pound prices by around 25%. 

“I’m in a situation where I may end up having to say to UK clients -- well, why don’t you pay me in euros?” Turner said.

(Updates with Asda, Iceland in eighth paragraph)