Bank of England Backs Euro As Brexit Approaches
Yesterday, The Times reported that the Bank of England has ploughed billions of the Treasury’s foreign currency reserves into euros since the Brexit referendum, in an apparent vote of confidence in the single currency.
Figures from the Bank — which manages stocks of foreign currency on behalf of the Treasury — show that Britain now holds more euros than dollars in its reserves, reversing the position of June 2016.
Perhaps it would come as no surprise that campaigners for a fresh Brexit referendum seized on the numbers as evidence that the government was betting on the stability of the euro even as ministers push for a clean break with the EU.
Labour MP Chris Leslie, the former shadow chancellor and supporter of the People’s Vote campaign, said: “The Treasury and the Bank are betting on the euro as a bulwark against growing instability in the world economy — instability that is being fed not just by Donald Trump and his enthusiasm for trade wars, but also by our own ministers’ dedication to delivering a hard Brexit that will cut us adrift from our biggest market and, in the catastrophic case of a ‘no deal’, potentially lead to serious chaos in supermarkets and money markets alike.” Leslie added:
“It hardly gets more ‘2018’ than this — ministers betting taxpayers’ money against the consequences of their own policies.”
The Times went on to analyse the numbers. “Foreign currency reserves in euros rose to $57.53bn at the end of June, up from $47.95bn two years earlier. Only a small part of that rise was accounted for by a rally in the euro against the dollar. Over the same period, the amount of dollars has fallen very slightly to $53.96bn.”
The dollar and the euro have frequently swapped places as the main currency for reserves over the past decade.
The Treasury holds stocks of foreign currency as a kind of insurance policy for a rainy day. In the event of a shortage of foreign currency or a run on the pound, the reserves could be sold to prop up sterling.
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However, it should be noted that in practice, the last government intervention in currency markets was on Black Wednesday in 1992.
The Bank of England, like other central banks around the world, aims to park the reserves in the safest, most easily tradeable currencies such as the dollar, the euro, and the Japanese yen.
A Treasury spokesman said: “Ensuring we have adequate reserves has been an important part of our economic plans for many years. In 2010, the government undertook to increase Britain’s foreign currency reserves, and a total of £60bn of additional financing has been added to the reserves over the past eight years.”
Edgar Miller of Economists for Free Trade said:
“These month-to-month fluctuations mean very little as the Bank traditionally holds over 90% of its reserves in the three great reserve currencies of the dollar, euro and yen. The real story, over the past two years, is that it has more than doubled its holding in currencies others than these from 2.1% to 5.0%.”
The revelation comes as concerns about the potential impact of a no-deal Brexit rock currency markets, with the pound falling 2% last week to a one-year low of $1.276 against the dollar. The ten-year low happened just after the Brexit result with the pound reaching $1.203 against the dollar so there’s some way to go before breaching that shocking sudden fall.
The Times concluded in its report that despite the declines, some investors think markets are only just beginning to get to grips with the potential fallout from a no-deal Brexit.
“Although we think it’s an unlikely outcome, in my opinion, a no-deal Brexit would result in sterling weakening from here,” said Mark Nash of Old Mutual Global Investors. The pound could “test” its record low of $1.05 reached in 1985, he said.
Mike Amey of Pimco, the world’s largest bond investor, said a 5%-10% fall in the pound on a no-deal outcome could see the pound hit its record low of €1.04. Even so, the California-based investment giant has placed a small bet the pound will rise.
The Times also found it hard to resist having a stab at the potential of a Labour government in the event that a no-Brexit deal caused a change of power by quoting Seema Shah of Principal Global Investors: “a no-deal outcome could undermine Theresa May, fuelling uncertainty. “In the event of a no-deal — or a palpably very bad deal — combined with a Corbyn government, we may well see the currency fall further and test the lows last seen in 1985,” she said.”