Pound falls as Carney warns of a rate cut

STERLING was hit by a doublewhammy yesterday as investors fretted about Britain quitting the European Union and the prospect of another cut in interest rates.

The pound fell to $1.4012 – its lowest level against the greenback for seven years – as Boris Johnson’s dramatic decision to join the ‘leave’ campaign continued to reverberate on global markets.

Britain’s fragile currency was also hit by the strongest signal yet from the Bank of England that interest rates could be cut again having been frozen at a record low of 0.5pc since March 2009. That would be good news for families anxious about their mortgage costs – including the 1.8m households who have never experienced a rate rise since buying their home.

But it would be a blow to Britain’s army of savers who have lost out since the financial crisis.

Experts warned that the prospect of lower rates and uncertainty over a Brexit would likely weigh on sterling between now and the referendum in June.

But it is hoped the fall in the pound could be a boost for the economy if it increases exports by making British- made goods cheaper for foreign buyers.

‘Sterling remains the main casualty of Brexit uncertainty and we expect the pound to fall further as the referendum nears,’ said Vicky Redwood, chief UK economist at Capital Economics.

‘However, this should not be viewed as an entirely negative development, as the much longedfor rebalancing of the economy probably requires a significantly lower exchange rate. ‘A lower pound is probably one of the more preferable ways for Brexit concerns to have affected the UK.’

Speaking to MPs yesterday, central Bank of England governor Mark Carney said the recent falls in sterling – it is down nearly 5pc against the dollar this year and more than 11pc since last summer – ‘have been influenced by the upcoming vote’ on Britain’s future in the EU. Striking a cautious note about the outlook, he told the Treasury Select Committee: ‘We have to be prepared for the possibility that the economy could be hit by bigger shocks particularly from abroad.’

The Canadian insisted the central bank has ‘absolutely no intention’ of following the European Central Bank or Bank of Japan by cutting rates into negative territory. But he added: ‘If we were in a position where the economy needed additional stimulus we could cut interest rates towards zero.’

Speaking alongside Carney, Gertjan Vlieghe, another member of the rate setting Monetary Policy Committee, hinted that he was close to voting for rates to be cut following a string of disappointing developments in the global economy.

‘I have relatively little tolerance for further downside risks,’ he said. ‘Should downside surprises continue then I think we will get relatively quickly to a point where I find it appropriate to respond to it.’

The comments marked a distinct change of tone from officials on the MPC who have regularly stated that the next move in interest rates is likely to be up. Vlieghe said the fall in the pound could boost exports – but warned that worries about Brexit could also hit economic growth.

‘We don’t think about it as just the isolated effect of a weaker exchange rate,’ he told MPs. ‘Everything else equal a weaker exchange rate boosts growth and boosts inflation. But we have to think about whey the exchange rate fell. In this case we think the exchange rate is falling because of increased uncertainty about what’s going to happen in the period leading up to, or the period following, the referendum.

‘It is possible that at some point that increased uncertainty from foreign exchange investors also ends up manifesting itself in increased uncertainty by households and businesses which may, or may not, delay or reduce their spending. So far we haven’t seen very clear evidence of that, but we are watching very carefully.’