How the Devaluation of the Pound is Impacting UK Defence

When it comes to the UK defence industry, the devaluation of the pound is going to have a big impact. The value of the pound has dropped drastically in the last few days, and it’s come close to reaching a record low compared to the US dollar. With high inflation rates, the growing need for military aid in Ukraine and economic uncertainty, the huge drop in the value of the pound is causing great concern for the defence industry and the Ministry of Defence (MoD).

Purchasing Power of the Pound in the US

One of the biggest impacts is on the purchasing power of the pound in the US, and this is due to the strong links between the US and UK. There are a lot of contracts held between the MoD and US suppliers, and the MoD procures a lot from US platforms. According to recent figures, 23% of MoD funds have been allocated to US suppliers, which shows just how important it is for the UK to have a strong relationship with the US. Now that the power of the pound in the US has dropped, buying goods from the US is more expensive than it was before. This will have a big impact on ongoing and planned procurements.

The added costs will put a lot of pressure on the UK’s defence budget, especially as these price increases were not planned for. Eventually, there is a risk that US suppliers will become too expensive for the MoD to use. Even SMEs in the UK are likely to suffer, as they are unlikely to have the additional funds needed to cover the price increases.

Reduced Investment in British Companies

With the devaluation of the pound, a lot of investors are selling up and swapping to stronger currencies, which takes a lot of money out of the UK market. This includes the US dollar, and many European currencies, who are benefiting from the boosted interest over the pound. For anyone who wants to spend the pound abroad, the plummeting worth means that there is a chance of losing out on money and getting far less than the currency was bought for. Instead of sticking with what they have, investors are investing elsewhere. However, it might attract foreign investors to the UK, as the reduced costs of operation, making the pound an attractive option.

Increased Inflation Rates

The Bank of England has announced that interest rates will be increased to deal with rising inflation rates. Though inflation is an issue that’s being felt throughout the US and Europe, any further rate increase could make problems worse in the UK. Inflation puts a greater pressure on the UK’s budgets, by making multi year contracts a lot more expensive. This means that the budget won’t stretch quite as far, even when serious budgeting is put into place. The Bank of England hopes to counteract this by increasing interest rates.