Bank of England's Ben Broadbent: Sterling has acted as buffer to absorb Brexit shock

The Bank of England’s deputy governor, Ben Broadbent, said that the pound has acted as an “important shock absorber” which has shielded Britain’s economy from the worst effects of Brexit.

The pound has slumped in recent days as Prime Minister Theresa May signalled the UK was heading for a so-called “hard Brexit”, which could mean leaving Europe’s single market.

But little else has suggested a full-blown downturn is on the way, with the stock market, property sales and household spending largely holding up since the referendum.

Broadbent told the BBC: “Having a flexible currency is an extremely important thing, especially in an environment when your economy faces shocks that are different from your trading partners.

“In the shape of the referendum, we’ve had exactly one of those shocks. Allowing the currency to react to that I think is a very important shock absorber.”

He warned that inflation is likely to rise above the Bank’s target of 2% on the back of sterling’s weakness, but that would be preferable to tightening monetary policy, which could produce “undesirable consequences” such as lower growth and a spike in unemployment.

His comments came a day ahead of the release of September’s inflation figures. Prices are expected to have risen by 0.9% last month because of the higher cost of imports. Inflation was 0.6% in August.

The EY Item Club has predicted inflation could surge to 2.6% next year before retreating to 1.8% in 2018. That will hit consumer spending, and business investment will fall amid uncertainty over trade terms with the EU. Growth will slow to 0.8% next year as a result.

“Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead,” Peter Spencer, chief economic adviser to the EY Item Club, said.