Real effective exchange rate

The real effective exchange rate (REER) of the pound sterling has recovered meaningfully over the five-year period to 2025-26, rising at a compound annual rate of 1.3% to reach an index level of 84.5. This follows the extreme volatility associated with Brexit and the COVID-19 pandemic, which had collectively depressed the rate to decade lows.

The early part of the review period was marked by a sharp rebound. The REER rose 2.5% year-on-year in 2021-22, recovering in tandem with the UK economic reopening, the ratification of the EU-UK Trade and Cooperation Agreement, and a strong vaccine rollout. However, an acute shock to the exchange rate came in September 2022, when then-Prime Minister Liz Truss announced mini-budget that triggered a dramatic sell-off in sterling, briefly sending the pound to all-time lows against the US dollar. The subsequent dismissal of both the Chancellor and Prime Minister, combined with a reversal of the fiscal measures, helped stabilise the currency. Nonetheless, over the course of 2022-23, the REER dropped 3.4%.

From 2023 onwards, the Bank of England's aggressive rate-hiking cycle, raising Bank Rate to a peak of 5.25% by August 2023, provided meaningful support to sterling, as the higher-yield differential attracted currency inflows. The pound rose against other currencies an average of 4.6% over 2023-24, its strongest annual gain since 2014-15. The BoE then began a measured easing cycle in August 2024, cutting rates gradually and reducing Bank Rate to 3.75% by December 2025. Despite the easing, the pound continued to appreciate across 2024-25. Sterling has had mixed fortunes in 2025-26. Uncertain economic conditions in the US following the launch of universal tariffs by the Trump Administration in 2025 saw a rapid appreciation of sterling against the US dollar. However, investors hedging against the dollar caused a major strengthening of the Euro, which the pound depreciated against significantly over the year. In early 2026, renewed disruptions in the Middle East with the US-Iran conflict caused a sharp strengthening of the US dollar as investors flocked to safe havens. Overall, the sterling REER is projected to depreciate 0.1% in 2025-26.