Project Fear?

So, the Bank of England reckons that the UK banking system is in a reasonable position to withstand a no-deal Brexit. The economy could be damaged, the pound could fall sharply, and interest rates could be cut to around zero, but the banking system should have sufficient liquidity to continue to function.

This makes the rather significant assumption that people will still have confidence in sterling, but why should they? If interest rates are likely to go into negative territory, whilst at the same time the value of the pound slides because of continued uncertainty, there is absolutely no reason to hold on to sterling or to save in the currency. The only reason you might have to use sterling is to support immediate needs because the people you are trading with accept nothing else.

Richard Branson, the Virgin boss, believes that a no-deal Brexit could cause the pound to plummet to parity with the dollar. He believes that this would be devastating for Virgin and could cause the group to shift investment out of the UK. I believe he could be right and that this issue extends to many other business and individuals, but so much depends on what the government proposes.

The Bank of England seems obsessed with ensuring that the banking system can continue to support the economy but all their efforts could prove worthless if the currency, which is what the whole system is based on, becomes so completely unstable that all confidence in it is lost. Nothing that the Bank of England has said so far indicates any capability or willingness to stabilise the currency under the different scenarios that could materialise under a no-deal Brexit. The government, such as it is, seems to be oblivious to the potential problem.

Under such circumstances the risk of sterling “tanking” must be quite significant. Potentially, this could do huge damage to the UK economy and many businesses and individuals could be completely wiped out. Project fear could be nothing compared to this.

What we need from the government and from the Bank of England is a plan of what they intend to do to prevent this from happening because what they have given us so far is completely inadequate and may, in the short term, do more harm than good. The October deadline is only three months away so plans are already being implemented which could bring about a complete economic disaster for the UK. In order to avoid this and restore confidence, the government, in particular, and the Bank of England must demonstrate effective leadership.

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