Bank of England policymaker: Sterling could fall further

A Bank of England policymaker has said he would not be surprised if the pound fell further, but that the Bank of England could overlook the effect of weak sterling on inflation, possibly for years.

Sterling slid below $1.23 on Tuesday, in line with forecasts from some major banks, but last week’s shock 10-minute plunge to a 31-year low has some wondering if a drop closer to parity is possible.

It weakened 0.3% to 90.35 against the euro, having depreciated to a seven-year low on Friday.

“Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely,” Michael Saunders told UK lawmakers in a written submission.

Britain’s current account deficit stands at about 6% of GDP — one of the largest in the developed world.

The Bank of England has said sterling’s fall since June’s Brexit vote should help to reduce it.

ING Groep, JPMorgan Chase, and Julius Baer Group have all reduced their year-end forecasts for the British currency since Friday’s flash crash.

The pound’s losses have deepened as UK politicians, led by prime minister Theresa May, failed to offer any clarity on how the UK government proposes to steer the nation through tough negotiations on exiting the EU.

“The sentiment on sterling is closely tied to expectations of hard Brexit,” said Georgette Boele, a currency and commodity strategist at ABN Amro.

Mr Saunders voted to keep UK interest rates unchanged at a record-low of 0.25% last month, in his first Monetary Policy Committee meeting since joining the Bank of England from US bank Citi, where he worked as its chief UK economist.

Another new Bank of England policymaker — University of Chicago academic Anil Kashyap, who has just joined the Financial Policy Committee — told lawmakers that sterling could weaken further if Britain suffers a ‘hard Brexit’, where it loses its preferential trading terms with the EU.

Mr Kashyap said Britain would not need to lose many financial services jobs to knock a hole in its government finances, something that could further damage the pound’s value. Sterling extended losses while Mr Saunders and Mr Kashyap spoke.

Mr Saunders said a “bumpy” process of leaving the EU that leaves Britain with a bad deal could result in much lower potential economic growth than recent trends suggest.

“If such a scenario were to materialise then, provided inflation expectations and pay growth remain well-contained, I would expect the MPC [Monetary Policy Committee] to largely look through any such direct effects on inflation of sterling weakness, even if they extend for several years,” he said.

Mr Saunders also said it was possible that leaving the EU could lead to faster wage growth and inflation for a given level of unemployment, due to the reduced availability of foreign workers.

However, he said he did not see signs wages were picking up yet, and that in recent years downward pressure on wages had dominated. There was still plenty of scope for the Bank of England to stimulate the economy further if necessary, Mr Saunders said.

“I think we’re still able to achieve our remit,” he said. “And I think it’s fair to say monetary policy is burdened. I don’t think I would yet say it is overburdened.”