Bank of England says City expects more sterling volatility before EU poll

Powered by article titled “Bank of England says City expects more sterling volatility before EU poll” was written by Sean Farrell, for on Tuesday 23rd February 2016 13.41 UTC

The governor of the Bank of England has said currency traders are buying more protection against the pound falling now that the referendum on membership of the EU has been announced.

Speaking at the Treasury select committee, Mark Carney said the central bank was not seeking to predict the outcome of the referendum, which takes place on 23 June, or the impact of a vote to leave. But he said it was watching for the potential impact of fluctuations in the value of sterling on economic activity.

“There have been movements in sterling since it’s been increasingly clear, and now clear, [about] the timing of the referendum. Particularly, there has been a sharp increase in risk reversals – buying more downside protection against future falls in sterling around the referendum date as opposed to upside protection,” Carney said.

“They have spiked to levels consistent with around the height of the Scottish referendum,” the Bank governor added, noting that they have been “particularly concentrated” in the sterling/dollar options market.

Carney said if uncertainty over the referendum started to affect confidence in the economy, the BoE’s rate setters would expect that to show up in surveys conducted by its agents across the country.

He said the BoE was making contingency plans and that its Prudential Regulation Authority division was keeping a check on banks’ planning for the vote.

Gertjan Vlieghe, who sits alongside Carney on the bank’s monetary policy committee, told MPs sterling’s fall could affect confidence among consumers and companies. Normally a fall in the pound would be good for the economy but that may not be the case because of the referendum, he said.

“It is possible that increased uncertainty from foreign exchange investors ends up manifesting itself in increased uncertainty by households and businesses which may or may not delay or curtail their spending. We haven’t seen very clear evidence of that but that is what we are watching very carefully.”

The pound tumbled to a seven-year low on Monday as traders reacted to the announcement of the referendum and the emergence of the London mayor Boris Johnson as a supporter of the out campaign. Currency experts forecast further falls in the value of sterling before the vote.

The pound had declined strongly against the dollar and the euro before David Cameron announced the referendum on Saturday in the expectation that the vote would be announced soon.

Carney said in October that EU membership had been one of the main reasons for Britain’s good economic performance in the four decades since it joined the bloc. But he also said membership had opened the UK up to shocks since the financial crisis.

The Bank governor and other MPC members appeared before MPs to discuss its inflation report. He will return to the committee on 8 March for a session about the EU referendum. © Guardian News & Media Limited 2010

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