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