Brexit: Bank of England prepares to diverge from EU rules
- UK small and medium-sized businesses report increased supply disruption due to new Brexit trade rules
- UK government launches GBP 20million Brexit Support Fund for small firms
- Bank of England preparing to break away from EU rules
- Pound Sterling (GBP) continues to climb higher against euro (EUR) and US dollar (USD)
New post-Brexit trade rules and regulations have opened new challenges for UK manufacturers and small businesses, with most reporting increased costs and heightened supply disruption.
Approximately two-thirds of small and medium-sized UK businesses have claimed that they have seen further complications with exports and imports following the Brexit transition period.
This month, several newswire reports said that EU exports had fallen by 68% year-on-year due to Brexit port chaos. While we are yet to see the full impact of new Brexit trade rules, several economists have warned that the UK’s departure from the EU will hold back economic growth in the second half of 2021.
According to the latest Manufacturing Barometer figure – a survey of nearly 300 small and medium-sized enterprises (SMEs) across the nation – two-thirds of respondents revealed that their business had seen negative price changes in their supply chains post-Brexit.
The survey also noted that more than half of the SMEs surveyed had cited export and import complications.
Meanwhile, 65% of UK manufacturers quoted increased costs, and 56% reported issues over the availability of raw materials.
More than a quarter of firms surveyed also felt that they had not received sufficient government support or guidance on navigating the challenges proposed by Brexit and have asked for further clarity on crucial trade issues.
The UK government has responded to Brexit chaos, stating that these early issues are merely “teething problems” and that these difficulties will subside as UK businesses adjust to new rules.
However, the UK government launched a GBP 20 million Brexit Support Fund earlier this week to help small and medium-sized businesses adapt to new trading rules with the EU.
UK government launches SME Brexit Support Fund
Chancellor of the Duchy of Lancaster, Michael Gove, announced a new multimillion-pound support fund for small and medium-sized businesses earlier this week to help firms navigate the implementation of import controls which come into force later this year.
The fund will only be available to SMEs that trade with the EU and are therefore exposed to new customs, origin, and VAT rules.
According to Mr Gove, businesses can apply for grants of up to GBP 2,000 to pay for training, professional advice and other targeted support that will help firms adjust to the latest rules and prepare for further changes to import controls in April and July.
The UK government is also believed to be creating a support package for the seafood sector. The combined effects of new Brexit trade rules and the ongoing COVID-19 pandemic have significantly affected the seafood industry.
Mr Gove said the UK government plans to introduce a Seafood Exports Working Group, which will offer immediate support on issues raised by the sector and support small businesses with goods traded between Britain and Northern Ireland.
The UK government will also make a guarantee scheme available for SMEs, which will provide an 80% guarantee on financial aid from lenders capped at GBP 25 million.
CEO of the British Independent Retailers Association (BIRA), Andrew Goodacre, welcomed the new Brexit support packages but warned that this would not be enough to help UK businesses combat the challenges of Brexit.
The Bank of England (BoE) also delivered a stark projection earlier this month, stating that Brexit trade disruption will knock 1% of growth off the UK economy in Q1 of 2021, equivalent to GBP 5 billion, and 10% in the long-term.
BoE policymakers could also make further downward revisions to this forecast given that the EU is refusing to grant the City of London equivalence status.
Bank of England making preparations to break away from EU rules
In a speech from Bank of England Governor Andrew Bailey last Wednesday, Mr Bailey said the BoE is preparing to diverge from the EU rulebook due to the bloc’s unrealistic demands for the City of London.
Governor Bailey said the EU was demanding more of London than it was of any other partners and that current policy gave a “false picture of a bank’s loss-absorbing capacity”.
Mr Bailey urged Brussels not to pick a fight over financial regulations with the UK. Still, the EU is refusing to grant equivalence to the City of London, arguing it “must better understand how the UK intends to amend or alter the rules going forwards.”
The BoE Governor went onto say “the EU is holding no other country to these rules and would, I suspect, not agree to be held to itself. It is hard to see beyond one of two ways of interpreting this statement, neither of which stands up to much scrutiny.”
London and Brussels are believed to be discussing terms on financial regulations, with March set as the deadline for when both sides must secure an agreement.
If both sides fail to reach an agreement, this could deliver a significant blow to the UK as banks outside of Europe wanting to purchase European stocks would no longer be able to trade via the London stock exchange.
However, Irish politician, Neale Richmond, is encouraging Ireland to take advantage of the UK’s departure from the EU.
Despite the relief expressed over securing Brexit border protocol, Mr Richmond said Ireland should “aggressively pursue opportunities for Irish producers to replace British suppliers in EU market places” now that Britain’s access to the single market is less straightforward.
However, the UK could find themselves tied down to EU rules if a Northern Ireland political party successfully execute plans to end port chaos with their “sea border” proposal which would stop sanitary and phytosanitary checks on meat and plant products.
Although Britain has previously declined a veterinary standards deal amid concerns this would chain Britain to EU laws for animal health and food safety, Mr Gove said the Northern Ireland Alliance Party’s proposal could be “a potential way forward.”
Despite mixed messages on Brexit and the threat of the UK being locked out of the EU’s financial market, pound Sterling (GBP) seems unaffected by post-Brexit trade drama.
Pound Sterling (GBP) continues to storm higher
Despite recent reports of unresolved Brexit tension surfacing, the British pound (GBP) extended its advances over the euro (EUR) and the US dollar (USD) over the past 24 hours and is expected to continue building on those recent gains.
While better-than-expected Eurozone gross domestic product (GDP) data has poured cold water on pound Sterling’s (GBP) gains during midday trade, as GBP fundamentals are improving, losses are likely to be limited.
At the time of writing, the British pound to euro (GBP/EUR) exchange rate is trading 0.1% lower at EUR 1.1448. However, expectations for a robust economic rebound in Q2 2021 could drive the currency pair higher in foreign exchange (FX) markets.
Meanwhile, the British pound to US dollar (GBP/USD) exchange rate has consolidated itself above the USD 1.39 level and is trading at USD 1.3921 – its highest levels since April 2018.
With the UK government set to ease lockdown restrictions due to achieving its vaccine target, investors continue to find the British pound (GBP) appealing.
Several currency strategists and analysts also forecast GBP/USD testing the USD 1.40 level this week, while GBP/EUR could breach EUR 1.15 if vaccine optimism continues to offer support.