United Kingdom’s well respected National Institute for Economic and Social Research (NIESR) has issued warning that Pound Sterling could fall as much as 20% if the Kingdom votes to exit European Union. In addition to that it expects economy will suffer immediate 0.8% hit to growth with inflation being on the higher side.
According to the institute, inflation will rise 2-4% more in the event of Brexit, compared to stay situation.
Bank of England (BOE) will have to make tough choices over interest rate front as inflation rises and growth sags. We expect BOE to use measures other than interest rates to keep liquidity ample and wait it out before taking up major measures over interest rates. Waiting out makes sense since impact of Sterling over inflation may prove only temporary and transitory.
Weaker Sterling, while shock in itself, should help support growth in the medium term.
We also expect, European Union, Euro Zone and Euro won’t be immune to the event as well. Bonds are likely to be hit, along with trade balance with UK.
Pound is currently trading at 1.443 against Dollar.
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