Pound Trending Down After Flash Crash, BOE’s Cunliffe Says

  • Says not easy to replicate London’s financial center elsewhere
  • Bank of England deputy governor speaks to Parliament committee

The pound’s weakness is persisting after last week’s flash crash, Bank of England Deputy Governor Jon Cunliffe said.

The sudden 6.1 percent drop in the U.K. currency during Asian trading hours on Oct. 7 may have had to do both with Brexit news and “with the way markets are currently configured,” Cunliffe said when testifying to the U.K. parliament’s upper chamber on Wednesday. “It recovered quickly, although the underlying trend for sterling, as we know, is down.”

Cunliffe said he wasn’t expressing a view on whether the market is right about the pound. The currency has fallen about 18 percent since the U.K.’s vote to leave the European Union. There haven’t been many market disruptions as traders react to Brexit news, which shows the "financial system is much more robust than it was," Cunliffe said.

While acknowledging that data since the referendum have been more positive than anticipated, Cunliffe said the “underlying narrative” remains true that “uncertainty about the U.K.’s future trading agreements with the EU and the economic impact of that” will reduce business investment and affect consumption and housing in the course of the next year. The bank will incorporate a weaker pound into the macroeconomic forecasts to be published next month, he said.

Brexit Debate

Sterling retraced some of its losses since the June 23 referendum on Wednesday as Prime Minister Theresa May agreed to let lawmakers debate her plan for Brexit, suggesting a less hard-line stance than previously envisaged. It was up 1.2 percent at $1.2262 as of 12:42 p.m. London time; that’s still lower than the $1.2616 close on Oct. 6.

Cunliffe’s fellow monetary policy maker Michael Saunders said Tuesday that a 20 percent fall in sterling could lead the level of consumer prices to rise by 4 percentage points over three or four years before the effect fades.

The BOE announces its next policy decision on Nov. 3, when it will also publish new projections for growth and inflation. Its last forecasts showed growth of just 0.8 percent next year, though some policy makers have indicated this could be revised up given better-than-expected data since the referendum.

Pending Divorce

The fate of Britain’s financial services industry has been a key part of the debate over the pending divorce from the European Union, especially after news emerged from senior figures in May’s administration that financial-services companies were not likely to get any special favors in the negotiations.

Removing passporting -- which allows financial-services firms to sell into other EU member states without having to set up a branch there -- would raise funding costs, Cunliffe said. He also said the cost of clearing derivative contracts would go up considerably if it’s forced to move to the jurisdiction of issue.

It’s unlikely that the ecosystem of the U.K.’s financial services industry could be transplanted elsewhere “in the foreseeable future,” Cunliffe said, though he would want to ensure an orderly transition no matter what the outcome for the industry.

“You want to make sure that control over risk is maintained throughout that process, you want to make sure that that contract certainty is maintained, that there is no discontinuity of service,” he said. “Wherever we are going, we clearly want to go there in a smooth and ordered way.”

— With assistance by Lucy Meakin, Scott Hamilton, Maria Tadeo, and John Glover

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