A storm in a China teacup?

Headlines have recently been captured by last week’s shock move by the People’s Bank of China to lower the daily reference rate for the renminbi. However, we doubt that this will have much bearing on either the economic recovery, or the outlook for monetary policy in the UK.

For a start, we remain unconvinced that this is the beginning of an out and out “currency war”. What’s more, the UK’s direct export exposure to China is fairly small. Granted, import prices may be pushed down, increasing the risk that deflation becomes ingrained. However, time lags mean we are unlikely to see the recent exchange rate moves reflected in consumer prices until next year. Given this limited impact, the slowdown in China is unlikely to be serious enough to influence the timing of the first rise in UK interest rates or the subsequent pace of tightening.