BoE Official Saunders Warns Of Further Drop In Pound Sterling Rate

Bank of England official Michael Saunders has indicated that based on current economic conditions, the pound sterling is likely to fall further.

The pound dropped below $1.23 earlier this week after falling to a 31-year low last week.

In a statement, Saunders said

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

The current account deficit for Britain is currently at approx. 6 percent of GDP which is one of the largest deficits across developed nations. The BoE has stated that the pound’s sustained fall in recent months will reduce this deficit. The pound has been dropping ever since British Prime Minister Theresa May said that Article 50 in the European Treaty will be triggered by March next year and several media reports subsequently suggested that the government may pursue a hard Brexit, which would see Britain take a hardline approach in negotiations.

Saunders is part of the Monetary Policy Committee (MPC) which participates in the interest rate policy decisions. He joined left Citi bank to join the BoE and had voted to retain interest rates at the last MPC meeting which was his first meeting in the BoE. Anil Kashyap, another freshly appointed BoE policymaker and an academic from University of Chicago has also pointed out that the pound sterling could fall further in case Britain opts for a hard Brexit, as it would see the country lose much of its access privileges to the single EU market.

Saunders has similarly warned that an unfavourable result in negotiations with Europe could result in serious damage to the British economy, which would be more extensive than what is being suggested by current trends. According to Saunders, the BoE could however overlook the consequent loss in pound value if inflation levels and wage growth remain manageable.

Nevertheless, he has expressed optimism that the country would fare better than expected in 2017. Saunders observed that it was possible that job growth and wages might grow faster after the Brexit as a result of reduced availability of foreign workers. However he pointed out that the wages trend had remained downward in the recent past and there were no signs now to indicate that wages were picking up.

In Saunders’s view, there is still plenty that BoE can do to further stimulate the British economy. He noted that while the monetary policy was currently burdened it was by no means overburdened.

Charlie Harrison

More articles by Charlie Harrison