EU Referendum: Government stockpiling foreign currency reserves to fight sterling volatility
Britain’s foreign currency reserves reached a new record high last month, passing $100bn (£70.5bn) for the first time, as the UK looks to be building a buffer to defend the pound against the prospect of a currency crisis ahead of the EU referendum.
Another $4.5bn in reserves was acquired in March, taking the total amount held to $104.2bn and fuelling speculation that the Treasury and Threadneedle Street are getting their ducks in a row to deal with wild swings in the value of sterling around the time of the referendum.
Since the Conservatives’ victory in last May’s general election, the UK’s holdings of foreign reserves have grown by one-fifth, while the value of the pound has fallen from around $1.55 to $1.42.
“In short, this is … stocking the tool shed just in case sterling needs explicit intervention around the referendum,” Simon French, Chief Economist at Panmure Gordon told City PM
The last time the government directly intervened to influence the exchange rate was in 1992 during the Black Wednesday crisis which saw the treasury spend more than £3bn in an unsuccessful attempt to keep Britain in the European Exchange Rate Mechanism (ERM).
Read more: Standard and Poor's chief economist does not think Brexit will be a disaster
Analysts said it remained unlikely that the reserves would need to be called upon, but that stockpiling was a “prudent” step, nonetheless. Expectations of widespread volatility in the price of sterling has already been seen on the financial markets, with indicators suggesting the pound could face the sharpest swings since the collapse of Lehman Brothers around the time of the referendum.
Oliver Harvey, macro strategist at Deutsche Bank, however, said that “any move lower in the pound may already be partly priced”, and that the Bank of England has “been much more active than for the Scottish referendum in signalling its willingness to stabilise financial markets.”
A spokesperson for the Treasury said, “in 2010 the government undertook to increase Britain’s foreign currency reserves. Ensuring we have adequate reserves is an important part of our long term plan for ensuring economic security.”