Of Cur­ren­cies Di­rect, ex­plains how Brexit was far from the be­gin­ning of the pound’s prob­lems

Da­vide Ugolini,

Living France - - LES PRATIQUES -

The UK vote to leave the Euro­pean Union on 23 June has weak­ened the pound sig­nif­i­cantly but it is only part of the story be­hind ster­ling weak­ness. In early Au­gust, the Bank of Eng­land an­nounced a very ag­gres­sive stim­u­lus pro­gramme to stave off the threat of a UK re­ces­sion. The ag­gres­sive na­ture of the mea­sures caught in­vestors by sur­prise, par­tic­u­larly as Mr Car­ney and his col­leagues at the Bank of Eng­land (BoE) de­cided not to take any ac­tion in July.

This new pro­gramme of mea­sures is prov­ing to be the driv­ing force be­hind the lower value of the pound. With in­ter­est rates cut to a new record low of 0.25%, the real ‘big deal’ for ster­ling right now is that the BoE is once again ac­tive and ready to flood the mar­kets with cash. This was clearly sig­nalled as it an­nounced plans to restart an as­set buy­ing pro­gramme to pur­chase UK govern­ment debt (Gilts) by adding an ad­di­tional £60 bil­lion to the mar­ket.

One of the usu­ally most hawk­ish mem­bers of the BoE Mone­tary Pol­icy Com­mit­tee, Ian McCaf­ferty, wrote in The Times that fur­ther quan­ti­ta­tive eas­ing and in­ter­est rate cuts are also a very real pos­si­bil­ity in the fu­ture, which sig­nals that the Bank is will­ing to do “what­ever it takes” to achieve eco­nomic growth with­out ac­knowl­edg­ing the neg­a­tive im­pact that th­ese mea­sures will have on pen­sion pots. Ros Alt­man, a for­mer min­is­ter un­der David Cameron was quick to point out that the Bank of Eng­land stim­u­lus has the po­ten­tial to tip the UK pen­sion in­dus­try into a fund­ing cri­sis as pen­sion funds are some of the big­gest in­vestors in Gilts.

On a pos­i­tive note, the lat­est eco­nomic data is re­silient and de­fies the doom and gloom fore­casted. In Au­gust, of­fi­cial UK man­u­fac­tur­ing re­sults were mixed, with in­dus­trial pro­duc­tion slightly bet­ter at 1.6% against an ex­pected 1.3%, while man­u­fac­tur­ing pro­duc­tion de­clined to 0.9% from an ex­pected 1.4% in­crease.

The BoE has tried to pre-empt an eco­nomic slow­down. A re­cent poll car­ried out by Reuters is now point­ing to a mild re­ces­sion, with the econ­omy ex­pected to con­tract by 0.1% in the third and fourth quar­ter as firms hold off in­vest­ment un­til there is a bit more clar­ity on what any Brexit deal will look like.

Most of those sur­veyed also thought that the BoE will cut rates again in Novem­ber, and ex­pect some sort of fis­cal stim­u­lus in the au­tumn state­ment as Gover­nor Mark Car­ney seems to be hint­ing that mone­tary pol­icy has its lim­its and fis­cal pol­icy could prove a more ef­fec­tive fix.

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