How low could pound fall in a 'Brexit'? Economists say try 1985

The British Pound suffered its worst fall in over a year over fears that Britain might decide to leave the EU.
The British Pound suffered its worst fall in over a year over fears that Britain might decide to leave the EU.PHOTO: EPA

LONDON (BLOOMBERG) - A British exit from the European Union would be so devastating for the pound that 29 out of 34 economists in a Bloomberg survey see it sinking to US$1.35 or below within a week of a vote to leave - levels last seen in 1985.

Twenty-three of the economists say sterling wouldn't recover from that rate within three months of the June 23 referendum. Seven see the UK currency falling below US$1.20 immediately after a "Brexit" vote. And just one sees it above US$1.40, which is around the seven-year low reached on Tuesday (Feb 23).

Reaching the lowest level versus the US dollar since 1985 would mean surpassing 2008's low of US$1.3503 and see it tumble to levels unvisited since Prime Minister Margaret Thatcher crushed the unions in Britain's miners' strike and London was aflame with race riots.

The pound has already dropped at least 2.6 per cent versus all of its Group-of-10 peers in 2016 as an uneven economic recovery and waning prospects of an interest-rate increase add to concern the nation will quit the world's largest single market. The slide has accelerated since Prime Minister David Cameron announced the date of the vote on Saturday, and everyone from politicians to corporations are now setting out their views for and against Britain quitting.

The pound would be hit hard by "the negative implications for growth and hence interest rates, but also because of capital outflows and concerns about the financing of the current-account deficit," said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.

The pound is already becoming a political football. Pro- Europeans cited Goldman Sachs' warning that the currency may fall 20 per cent on a Brexit in their campaign material.

Sterling slumped the most since 2010 on Monday after London Mayor Boris Johnson, one of the nation's best-known politicians, lent his support to the "Leave" campaign, putting him at odds with party colleague Cameron.

The prime minister was questioned by lawmakers on Monday and asked whether the pound's slide is a sign of the economic upheaval that would follow an out vote. And Bank of England Governor Mark Carney was drawn into the debate on Tuesday, acknowledging that the referendum campaign is weighing on sterling.

The BOE would respond to a vote to leave the EU by cutting interest rates from their record-low 0.5 per cent, said Enrique Diaz-Alvarez, chief risk officer at Ebury Partners, a London- based broker which topped Bloomberg's rankings for forecasting euro-sterling in the second quarter of 2015. This could happen as soon as the day after the vote, he said.

"The theme of the last few years has been currencies dominated by the relative stance of central banks, and clearly if Brexit does happen we'll see an immediate response from the Bank of England," said Mr Diaz-Alvarez, who didn't take part in the survey. Officials would "cut back to zero, removing all chances of a hike in the immediate future."

The pound is already at the lowest level since March 2009, falling to US$1.4013 on Tuesday. It's approaching the 14-month low of 78.98 pence per euro reached on Feb 11, and is at its weakest on a trade-weighted basis since March 2014.