UK Brexit Fears

The UK pound plummeted to a fresh seven-year low in late February as the possibility of a ‘Brexit’ fuelled uncertainty, undermined confidence and divided politicians. The crucial referendum on Britain’s membership in the European Union has been scheduled for June 23, after Prime Minister David Cameron completed his renegotiations of proposed new terms for the UK-EU relationship. Mr Cameron has promised to campaign hard to prevent Brexit, but his Conservative party remains deeply divided on this subject, heightening political tensions. Analysts are expecting insecurity on UK’s position in Europe to dissuade foreign investors from buying British assets, possibly fuelling a slowdown in growth, not to mention unwanted volatility in the currency. Questions have been raised about how this would effect monetary policy, as further sell-offs in sterling could raise import costs and affect capital flows. Bank of England (BoE) governor Mark Carney has warned that the spectre of Britain leaving the EU is the “biggest domestic risk to financial stability”. Current weakness in the exchange rate could be positive in the sense that it would aid inflation, currently near zero, and the competitiveness of exports. However, Brexit could create significant economic and FX uncertainty, with potential negative effects on the country’s large trade deficit.

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