Bank of England policy makers have stood by analysis suggesting the British Pound is at risk of losing substantial ground in the event of a disruptive ‘no deal’ Brexit taking place in 2019.
“The fall (in Sterling) since the referendum represents the market’s view on a range of possible outcomes. And essentially the larger the effect on UK trade, the UK exit, the further the sterling is likely to fall, for various reasons. So at the moment what is ‘priced in’ to the level of the exchange rate is a number of possible outcomes,” says Ben Broadbent, Deputy Governor of the Bank of England.
Broadbent and other Bank of England were giving evidence to parliament’s Treasury Select Committee about a BoE report on the potential economic impact of Brexit in Britain’s parliament on Tuesday.
“So if the eventual exit is towards the better end of that range, you would expect sterling to rise from here, if it’s towards the worse end of that range, you would expect it to fall further. And generally, the greater the economic dislocation, the worse the exchange rate is going to be, there’s a direct relationship,” adds Broadbent.
Bank of England Governor Mark Carney adds that currency market participants have not yet fully factored in a disorderly Brexit into the price of Pound Sterling, suggesting to us that the Governor sees the potential for deeper falls in the value of the currency.
On November 29 the Bank of England released a ‘war gaming’ analysis of the potential impact to the UK economy of various Brexit scenarios.
Notably, a disorderly ‘no deal’ Brexit could crash Sterling, which would in turn force the Bank of England to hike interest rates sharply towards the 5.5% mark in order to combat inflation stemming from the currency’s decline.
According to the analysis, aimed at testing the resilience of the UK financial system, if Prime Minister Theresa May fails to pass her Brexit plan Sterling would fall 25% under a worst-case scenario.
Source: Pound Sterling Live