Former head of the UK civil service, Lord Kerslake, has warned that British pound will continue to fall in value and could reach parity with the dollar for the first time in history if there is no Brexit deal.
Lord Kerslake, who was the head of UK civil service 2012 – 2014, told Business Insider that the British pound could drop to $1 in the event of a disorderly exit from the European Union on October 31.
“You could reasonably expect that it will carry on falling, potentially to parity with the dollar,” Lord Kerslake said.
Boris Johnson, UK’s new prime minister who took over from Theresa May, has long vowed that the United Kingdom will leave the European Union on October 31, with or without any agreement.
In an emotional statement on Friday May 24, Theresa May announced her resignation after Brexit deal she fought hard for, failed.
Since Boris Johnson took over last month, the growing skepticism of him delivering no-deal has affected the value of the pound which has continued to fall.
In the last three months, Pound has dropped more than seven percent – the worst performance of any major currency. It fell 0.6% to $1.2056 on Friday, its weakest since January 2017, adding to its 4.5% fall over July and August.
As at August 11, 2019, 1 Pound sterling = 1.20 United States Dollar.
Official figures released on Firday showed that that the UK economy shrunk by 0.2% in the second quarter of this year — the first time it has experienced negative growth in seven years.
Kerslake also said the Bank of England would be forced to consider hiking interest rates to prevent a prolonged run on the currency in a no-deal scenario, a move which would drive up inflation, consumer prices, and mortgage rates.
“The normal response, if you face a major run on a currency, is to raise interest rates,” he said.
“But that’s immensely damaging to the economy, and to people’s real incomes because it results in higher mortgage rates. So we could face a very, very difficult dilemma.”
Rupert Harrison, a fund manager at BlackRock, and analysts at Morgan Stanley have also predicted that the pound could trade level with the dollar in the event of a no-deal Brexit.
“The pound is at a much lower level now but I still think a no-deal exit would lead to significant volatility and we could be testing parity on a really bad outcome,” Harrison told Bloomberg.