IMF warns that "disorderly" Brexit could result in 15% drop in sterling
Sterling is forecast to tumble more than 15% if the UK exits the EU without a coherent plan the International Monetary Fund (IMF) has cautioned.
The pound was up to 15% overvalued on fundamentals today, said the IMF’s annual Article IV assessment of the UK economy, but should Brexit lead to a signficiant increase in trade barriers “the equilibrium exchange rate could be more depreciated than suggested here.”
At $1.399 the pound has recently rallied, and is currently only 7% lower than its pre-referendum level against the dollar. A “bad Brexit” that wiped 20% off sterling’s value would see the pound plunge close to $1.10 on the IMF analysis, a level last seen in 1985.
The British economy could be devastated by a much weaker pound, as inflation would be forced upwards and household incomes would be squeezed.
The IMF has urged the government to stimulate the econonmy with debt fuelled spending in the event of a disorderly Brexit.
“There is some fiscal space to help smooth the adjustment. The UK faces limited financing risks in the near term despite a relatively high debt burden,” it said.
However, the IMF emphasized that a disorderly Brexit was only a “tail risk’ and said that UK authorities are “prepared to respond to a wide range of shocks.”