In the case of a no-deal Brexit, the British pound continues to fall in value and the currency can be worth 1 dollar for the first time in history. Lord Kerslake, former head of the British civil service, gives that warning.
“It is reasonable to expect the pound to continue to fall, possibly parity with the dollar,” Kerslake, who led the British civil service between 2012 and 2014, told Business Insider.
The new British Prime Minister Boris Johnson has repeatedly asserted that the United Kingdom will leave the European Union on 31 October, with or without a deal. The growing risk that it will turn out to be a “no deal” has already lowered the pound since Johnsons took office in July.
Over the past three months, the pound has already lost 7 percent of its value against the dollar, making it the worst of all major currencies.
UK economy is shrinking
On Friday it was announced that the British economy shrank unexpectedly by 0.2 percent in the second quarter. This is the first quarterly contraction since 2012, according to figures from the British statistics agency.
According to Lord Kerslake, in a “no deal”, the British central bank should consider raising interest rates to prevent a lengthy flight from the pound. Such an interest rate increase would drive up inflation, consumer prices and mortgage rates.
“The usual response to a flight from a currency is to raise interest rates,” said Kerslake. “But that is immensely harmful to the economy, and to real incomes because of the rising interest rates. We can therefore be confronted with a very, very difficult dilemma.”
Rupert Harrison, fund manager at asset manager BlackRock, and analysts at bank Morgan Stanley also predicted that the pound could fall to 1 dollar after a no-deal Brexit. However, according to a Bloomberg survey, the damage would be limited to $ 1.10.
“The pound is already much lower, but I think it could be worse without a deal and that we would then test the parity with the dollar,” Harrison told Bloomberg.