The pound tumbled below $1.39 for the first time in seven years on Wednesday as analysts warned that a vote to quit the European Union would severely damage the UK’s growth prospects.
Sterling dropped to $1.3883 and also suffered against the euro after HSBC issued one of the starkest warnings yet of the dire consequences from a Brexit vote.
Analysts at the bank said sterling could lose another 20% of its value against the US dollar, pushing its value towards $1.10 – a level not seen since 1985 when the miners’ strike was in full swing.
A steep rise in the cost of imports following the currency’s collapse would send inflation spiralling, forcing the Bank of England to raise interest rates.
The analysts warned that the ensuing turmoil would knock 1.5 percentage points off GDP growth in 2017, losing almost all the 2.3% growth rate the Bank of England expects should the status quo be maintained.
“Our central case in the event of a vote for Brexit is that uncertainty grips the economy. This could take around 1.0-1.5 percentage points off the GDP growth rate by the second half of 2017. This would push our 2017 growth forecast, currently 2.3%, into the 0.8-1.3% range,” the analysts said.
“And if sterling were to fall by around 15-20% (as our currency strategists predict), UK inflation could rise by up to 5 percentage points (our end-2017 inflation forecast is 1.8%). In the event of a vote for Brexit, concerns about deflation could swiftly give way to worries of stagflation.
Last year analysts at Morgan Stanley said a Brexit vote would expose the country to a “referendum shock” and a “flirt with recession”.
Analysis by the Centre for Economic Performance at the London School of Economics has also dismissed the Leave campaign analysis that the UK economy would be unaffected.