Daily Mail

Brexit in the crosshairs

- Alex Brummer

AT THe height of the financial crisis in 2008, as the Government was about to inject £500bn of rescue funds into the banking system, I was briefed by a senior Treasury official on the necessity of such action.

The risk was that without the bailouts there would be a calamitous fall in sterling on the financial markets.

It has been an unwritten convention in Whitehall that senior political officials avoid any action which potentiall­y could damage the currency. In our current political chaos, that has gone by the board.

Shadow Chancellor John McDonnell, dangerousl­y, has remarked that if Labour were to be elected he would expect a run on the pound. Given Labour’s gung-ho approach to fiscal policy and plans to flood the market with nationalis­ation bonds, it is difficult to argue.

The Tories learnt the hard way on ‘Black Wednesday’ in 1992 that you lose control of the currency at your peril.

The chaotic events surroundin­g the exit from the exchange rate mechanism and loss of confidence in Conservati­ve competence were among the factors which opened the door for new Labour in 1997. It is therefore

a huge shock to the markets to hear Conservati­ve politician­s making what many believe are undelivera­ble promises on Brexit, including dumping the backstop.

Indeed, lack of prudence by Tory leadership candidates has produced a sharp rebuke from former Permanent Secretary to the Treasury Sir nick Macpherson.

He noted that maintainin­g the purchasing power of the pound was a ‘core responsibi­lity of the British state’. He added that this was recognised by Tory government­s but that the current candidates to be the next prime minister ‘ seem determined to debauch the pound’.

Such strong language from a former Treasury mandarin is unpreceden­ted, but so has been the coarseness of the Tory leadership debate with its uncosted spending and tax promises, and cavalier approach to the most critical political issue of our time.

The pound already has been dragged down to $1.24 against the dollar, and to all intents and purposes is at parity with the euro.

In the past month, sterling has fallen 1pc against the euro and 2.3pc against the dollar, even if it has yet to hit the low of $1.15 reached in Asian trading in october 2016. Strategist­s at HSBC are projecting a no Deal would send the pound down to $1.10.

All of this is certain to be weighing on the minds of Bank of england policy-makers. They will have several concerns.

The value of sterling is one of the factors which goes into forecasts for output, so an adjustment might be needed.

At a time when the labour market is close to full capacity and wage levels have started to surge, the Bank may be less able to ignore a fall in the pound and a rise in inflation as a temporary event.

Some members of the interest rate-setting Monetary Policy Committee may feel the need to vote for a policy tightening.

As worrying are the financial stability implicatio­ns. The governor, Mark Carney, and his team spent many anxious months reaching an agreement with the eU and european Central Bank so that, in the case of a no Deal Brexit, £70trillion of open derivative­s contracts would be honoured. That deal expires on March 31, 2020.

But since these contracts stretch over three months, the transition arrangemen­t comes to an end on the last day of December this year.

That means a new negotiatio­n with new eU and eCB presidents, which could be Carney’s last act as governor. Leaving without a deal is no walk in the park.

Hot water

InVeSToRS in Britain’s beleaguere­d water sector will be glued to their screens this morning.

Regulator ofwat will present its settlement for the next five years against a background of anger about leaks and sewage dumps, outsized dividends paid to overseas investors and fat-cat pay for the three UK quoted companies.

With Labour looking over ofwat’s shoulder, the settlement will be demanding – requiring a huge efficiency drive, a big push on investment and greater transparen­cy about ownership and governance.

Crucially, for the consumer, the goal is to bring down bills by something like £25 per household.

The companies will have no choice but to comply or potentiall­y face the wrath of John McDonnell!

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