Brexit might cause sterling crisis, UK economy would suffer: strategists
LONDONMar 03, 2016 - 12:00 am GMT+3
Mar 03, 2016 12:00 am
Britain's economy would be worse off if the country left the European Union, according to foreign exchange strategists who said a so-called Brexit might also cause a sterling crisis.
Britons will vote on June 23 whether to quit the EU, and none of the 45 strategists polled by Reuters this week said the economy would benefit if the "Out" campaign wins.
Thirty-nine said it would damage the economy and six said it wouldn't make much difference. All but one economist polled by Reuters last month said the economy would suffer; the exception said it would have no effect.
"The negotiating period would be far longer than some have suggested. There was a government report earlier this week that said it could take as long as a decade, so you would have that uncertainty hanging over businesses," said Ryan Djajasaputra at Investec.
The prospect of Britain's leaving the EU rattled the country's dominant services industry last month, driving growth to a near three-year low, a survey showed earlier on Thursday .
Strategists were less sure a departure would lead to a sterling crisis, with 35 saying there would be and 34 not.
"It depends on the definition of what constitutes a crisis, but sterling has the capacity to drop sharply enough to create significant uncertainty about inflation and investment," said Jane Foley at Rabobank.
Recent polls put the outcome close but narrowly in favour of staying in. Even so, the pound sank to a seven-year low last week after London Mayor Boris Johnson put himself at the front of the "Out" campaign.
The currency has lost around 9 percent against the dollar since the Conservative party won power in May last year, with Prime Minister David Cameron promising a vote on membership, suggesting much of the risk may already be factored in.
Sterling is forecast to trade around $1.40, where it currently hovers, in a month's time and still be there in three months, just before the vote. A year from now cable will be trading at $1.46, the poll predicted.
Those forecasts are all a cent or two weaker than predicted a month ago, after a chain of recent data delayed some calls for policy tightening from the Bank of England.
Against the euro, sterling is expected to gain ground. The European Central Bank is almost certain to cut its deposit rate further into negative territory and possibly expand its asset purchase programme next week, a Reuters poll found.
In a month's time, one euro will be worth 77.2 pence but only 73.9p in six months. In a year it would fetch 72.4p. The respective forecasts in last month's poll were 75.3, 73.8 and 71.4.
About the author
Research Associate at Center for Islam and Global Affairs (CIGA) at Istanbul Sabahattin Zaim University