Change can be disruptive, so it’s no surprise that Brexit is expected to present challenges. The massive undertaking has come a long way, but there are still plenty of details that need attention. For many UK consumers, the financial impacts of Brexit are yet unknown, pushing monetary concerns to the forefront.
Will personal costs of living rise or remain unchanged following Brexit? Are investments safe, given the sweeping financial overhaul required to complete the transition? Will UK interest rates rise as a result of the decision to leave the EU? Answers to these and other finance questions will help Britons sort out their finances leading up to the final stages of the divorce, but many of the particulars are still uncertain. As changes continue to unfold, how will Brexit affect your personal finances this year?
Complex Financial Relationships
If you’ve ever made financial decisions as a member of a group, you know how difficult it can be for negotiations to settle on a single, agreeable course of action. With so many complex, interconnected monetary relationships involved, working out the financial details of the Brexit split is a huge project.
As each phase of negotiation moves forward, the UK economy responds to potential Brexit backlash. With these continuous reactions altering conventional wisdom from day to day, it’s hard to predict how financial matters will settle after all the issues have been addressed. Instead of making wild guesses about your financial future, you’re better off understanding how various financial entities interact and the impact Brexit may have on complex finance relationships.
Stock Market Reaction to Brexit
Shortly after the referendum, Brexit’s effect on stock prices could be seen as share prices fell in response to the vote. Momentum in the wrong direction was relatively short lived, however, as the decline in sterling that followed actually increased profits for some FTSE 100 firms. With the subsequent rise in international shares, the market has now taken on an unusual “split” dimension. On one hand, international stocks have continued to perform well. Yet at the same time, firms with a domestic focus have not delivered the same kind of profits for investors.
If the lack of confidence in UK based firms is any indication of what’s expected, a smooth Brexit transition could actually help close the gap between overseas-focused shares and underperforming domestic stocks.
The pound promptly lost value following the referendum. Sterling’s recovery since then would have been hard to predict with prevailing skepticism about the impact of the vote. But as the UK economy remained buoyant following the vote to leave the EU, sterling mounted a recovery. The sense of security brought on by the pound’s gradual improvement could help keep sterling strong throughout negotiations and implementation of Brexit reforms.
It is thought even a rocky exit won’t bring about a severe a drop in sterling value. However, suffering sterling could again place pressure on firms focused on providing domestic goods and services. Future inflation is closely tied to the fate of the pound. If sterling stays steady, inflation will back off, but a lagging pound could add to consumer spending woes.
Conservative Approach to Interest Rate Hikes
UK consumers carry a lot of debt, so the Bank has plenty of incentive to keep interest rates under control. Although a spring rate adjustment was anticipated until recently, many informed observers now feel the prospect is less likely than it was a month or two ago. Poor pound performance could ultimately tip the scales in favour of a rate hike, but a conservative approach will most likely override inflation concerns and other markers that traditionally inspire the Bank to take action.
It’s difficult to predict how individual finances will fare during the remaining Brexit negotiations and beyond. As a result of the uncertainty, UK financial markets have been cautious leading up to the exit. This measured approach could help the UK absorb some of the inevitable financial challenges arising from Brexit and ease consumer concerns about the impact of the historic vote.