Brexit uncertainty drags pound down and holds back rate rise

Bank of England issues warning

Barclays’ chairman has warned that the City of London would end up in a “significantly worse” position if Britain votes to leave the European Union (Getty)

Uncertainty over the outcome of the looming Brexit referendum on EU membership is already dragging down the pound, the Bank of England has signalled.

Minutes of the Monetary Policy Committee’s latest meeting – at which it left interest rates at just 0.5 per cent for the 82nd month in a row – highlighted that the pound had fallen 3 per cent in trade-weighted terms since November’s Inflation Report.

While the European Central Bank’s more-hawkish-than-expected December decision was partly responsible, the minutes said “some

market contacts had additionally cited the forthcoming UK referendum regarding EU membership as a possible explanation”.

The minutes noted that there “had been an increase in the price of protection against the risk of sterling depreciation compared with the price of protection against an appreciation”.

The comments are a first hint that the Bank could hold fire on rate rises until after the referendum. The Bank’s economists also downgraded growth forecasts to 0.5 per cent for the last quarter of 2015 and the current quarter, although lone hawk Ian McCafferty maintained his call for a rate rise to 0.75 per cent.

Citigroup’s UK economist Michael Saunders said the risk of an EU exit was weighing on business confidence, adding: “If Brexit-related uncertainties weaken sterling further, the MPC would probably wait to see where things settle when the referendum is past.”