Pound sterling falls below $1.31 hitting new 31-year low

The pound hit fresh lows after the Bank of England confirmed that the financial stability of the UK had already been affected by Brexit

Hazel Sheffield
Tuesday 05 July 2016 13:46
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Carney: We have a clear plan

The pound has fallen below $1.31 for the first time in 31 years amid growing concerns about the financial stability of the UK after the decision to leave the EU.

The Bank of England's twice-yearly stability report had earlier confirmed that the financial stability of the UK had already been affected by Brexit, helping to push the pound lower.

“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging,” the Bank of England said.

The last time the pound was worth less than $1.31 was in September 1985.

It slipped to $1.3075, down 1.6 per cent after Aviva suspended trading on its property fund, worth £1.8 billion, breaching the $1.3118 low reached on the Monday after the results of the referendum were announced.

The pound was trading down 1.91 per cent $1.3035 as markets closed on Tuesday.

That means the pound is worth 12 per cent less to UK holidaymakers in the US than it was before the referendum.

The pound was down 1.34 per cent against the euro at €1.1749 at the close.

Aviva followed the lead of Standard Life and stopped trading on its property fund to prevent a rush on withdrawals as investors tried to take their money out of the property market.

The Bank of England warned in its twice-yearly assessment that the share prices of real estate investment trusts had tanked. This could have a knock on effect to domestic companies and the wider economy because 75 per cent of small businesses use commercial property as collateral for loans.

Mark Carney, governor of the Bank of England, has said 'ome monetary policy easing will likely be required' 

"Any adjustment in commercial real estate markets could be amplified by the behaviour of leveraged investors and investors in open-ended commercial property funds. Any such amplification of market adjustments could affect economic activity by reducing the ability of companies that use commercial real state as collateral to access finance," the Bank of England said.

Stress tests at smaller UK banks, conducted after the financial crisis of 2008, have shown that they can absorb a 30 per cent fall in property prices.

Colin Dewar, head of currency dealing, HL currency service, said that the pound would stay volatile until a clear picture had emerged about what the Bank of England has planned for interest rates.

“Carney reiterated that the Bank has a wide range of tools if further easing is needed, but declined to offer any indication as to when the Bank might act," Dewar said.

"The increasingly poor picture surrounding the UK’s economy makes next week’s Monetary Policy Committee meeting all the more important. Sterling is likely to remain subject to volatility until we have a clear picture of the central banks’ monetary policy path," he added.

The Bank of England has signalled that it was likely to cut interest rates over the summer, with a move to lower the cost of borrowing to come as early as July.

Mark Carney, governor of the Bank of England, did not confirm a date for interest rates to change when he presented the stability report on Tuesday.

As part of the measures planned to fight off a downturn, the Bank has reduced capital buffers by £5.7 billion, effectively allowing banks to lend £150 billion more to households and businesses.

Carney said changes to lending rules were to combat signs that people were pulling out of investments and becoming less keen to take risks.

He said that the two-day fall in sterling was the sharpest in half a century, but that the lower value of the pound was “necessary” for other adjustments in the economy.

“The adjustment in sterling has been significant and was sharp initially.

“That adjustment has moved in the direction that is necessary to facilitate some of the economic adjustments that are needed in the economy,” he said.

But with interest rates already at a record low of 0.5 per cent, it is unclear whether changes to lending rules will be enough to get households and companies to borrow and invest more money.

"Given already record low interest rates, and in light of the risks facing the British economy and neighbouring states, there is little confidence in undertaking new borrowing among companies and households," said Mihir Kapadia, CEO at Sun Global Investments.

"The current state of affairs surrounding not only Britain’s relationship with Europe but also the leadership battles affecting both major political parties is likely to encourage a risk-averse attitude and a collapse of consumer confidence," he said.

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