“The whole thing has generated reactions which are over the top,” King said.
Just 24 hours later and sterling was, last night, printing figures below $1.21 as foreign exchange traders in New York fled from the UK’s currency. Never mind last week’s flash crash, the pound is now more than two-and-a-half per cent down in this week’s trading alone. On the night of the EU referendum, when a Remain victory still seemed likely, sterling was trading around $1.49.
King’s former Bank of England colleague, Andrew Sentance, pointed out yesterday that the speed of the drop is nearly equivalent to the pound’s fall during the economic crisis of 1975-77, when the government was forced to go cap-in-hand to the IMF.
Let’s be clear, Britain’s economic situation is in no way comparable to that of 40 years ago, but King is wrong to say that sterling’s decline, and the volatility it has sparked on trading floors, can be brushed aside.
Another Bank official, former Citi economist Michael Saunders, said yesterday that import prices are expected to climb “perhaps 12-13 per cent”, thanks to sterling’s drop. Consumer price inflation is forecast to hit at least 2.5 per cent next year. And while a weaker currency is sometimes a boon to exporters, UK exports are not especially price sensitive – certainly not when it comes to top-quality financial services. Higher import costs will squeeze profits, while inflation (and thus lower real wage growth) could dent domestic demand.
As for the cause of the drop, it is difficult to point a finger at King’s successor. Mark Carney may have loosened policy in the wake of the referendum, but traders believe the chances of further easing next month are below 10 per cent.
Rather, they are looking in the direction of Westminster, where MPs squabble over the procedure for triggering Article 50, and the PM appears almost indifferent to the post-Brexit prospects of our financial sector.
Instead of fretting about executive pay and corporate culture, it’s time Downing Street took sterling’s crash seriously and provided convincing reassurance that it will prioritise the health of the UK’s strongest industries while negotiating our split from Brussels.