By Conall MacCoille of the Bank's Monetary Policy Unit and Karen Mayhew and Kenny Turnbull of the Bank's Inflation Report and Bulletin Division.
Since the middle of 2007, the sterling effective exchange rate has depreciated significantly. Over the same period the UK terms of trade - the price of the United Kingdom's exports relative to imports - have remained broadly unchanged. Movements in the exchange rate can affect the price of exports relative to imports. But the timing, size and even direction of the impact on the terms of trade will depend on how companies respond to the movement in the exchange rate. This article considers the factors that determine how the terms of trade move in response to an exchange rate depreciation, and investigates what lies behind the stability of the UK terms of trade since 2007.
Accounting for the stability of the UK terms of trade