Bank of England official said he expected further fall driven by referendum result and UK’s trade deficit with rest of world

The pound endured another day of pressure from investors on Tuesday after continued jitters on the foreign exchange markets pushed it down more than two cents to $1.21.



Sterling recorded its worst four-day performance since the Brexit vote as a Bank of England official said he expected the pound to fall further in the coming weeks, driven by the referendum result and the UK’s trade deficit with the rest of the world.

The exchange rate with the US dollar stood at $1.30 last week when Theresa May opened the Conservative party conference and appeared to put regaining control of immigration above staying inside the EU’s single market free trade area. Investors took fright at the prospect of a hard Brexit and the currency has declined more than 6% against the dollar since then.

A flash crash last Thursday, when the pound fell by 6% in 10 minutes, heightened concerns that investors had lost faith in sterling as a major currency. A year ago a pound bought $1.55.



However, the pound’s decline had the opposite effect on the UK’s leading share index. The FTSE 100 touched a new intra-day record of 7,129.83 during afternoon trading, although it closed nearly 60 points lower after a late bout of selling, below the record closing figure of 7,104 reached last year. The driving force for the UK market’s recent surge has been the rapid decline in the pound, which has boosted the value of companies that earn much of their revenues in dollars.

Michael Saunders, a former investment banker who joined the monetary policy committee (MPC) in August, said Britain’s large current account deficit was adding to the anxiety about the ability of the nation to pay its way once it quits the European Union.

Saunders said the current account, which measures the balance of trade, cash transfers and investment income with other countries, was already undermining confidence in the UK’s ability to pay its way before the EU referendum.

Speaking to MPs on the treasury select committee, Saunders warned it was now a major issue and compounding the already weak sentiment on currency markets towards sterling.

“Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely,” Saunders told MPs on the treasury select committee.



Saunders, who joined the MPC from the US investment bank Citi, where he was chief economist, said investors were weighing up the implications of Britain leaving the EU.



“The work done by the International Monetary Fund and the OECD suggests that the long-run effects of the UK’s exit from the EU is that growth will be lower. If all we are doing is adjusting to a new equilibrium, that is not a concern,” he said.

Only if the pound plummets or triggers falls in other markets would the Bank of England need to consider cutting rates to bolster confidence and growth, he added.

“If such a scenario were to materialise then, provided inflation expectations and pay growth remain well contained, I would expect the MPC to largely look through any such direct effects on inflation of sterling weakness, even if they extend for several years.”

But the lower pound, which reduces the cost of UK goods and services sold abroad, could boost exports and offset much of the anxiety caused by the Brexit vote.

A fall in imports would also help to reduce the current account deficit, he said, adding that the government could take advantage of the current depressed situation to boost growth with extra spending.

Several Tory MPs, including supporters of the leave campaign, have warned that leaving the single market will harm the economy and have demanded ministers make every effort to negotiate continued access.



But the hardline taken by Downing Street and an equally robust response from European leaders, who have emphasised the free movement of labour as a pillar of the single market, have heightened concerns in the City that Britain will eventually leave all the EU’s major institutions.

Kathleen Brooks, research director at financial betting firm City Index and Forex.com, says traders fear the UK could be dragged back by Brexit uncertainty.

She told BBC News that: “The weakness in the pound is really a sign that investors don’t have confidence in a post-Brexit UK economic outlook. They think Brexit is going to be very negative for the UK economy, and UK GDP could contract going forward.”