Labour’s sterling efforts

Wednesday 27th September 2017

There’s a saying in Yorkshire, ‘When in doubt do nowt’. It probably would have been better if Labour, which claimed yesterday to be effectively wargaming a run on the pound should it win a general election, had kept quiet about the whole thing.

It’s tantamount to an admission Labour’s policies would crash the economy, or at least the perception of it to the rest of the world – and for the Shadow Chancellor John McDonnell to describe an attack on sterling as an establishment backlash is student stuff. It’s the beasts in the money markets that would trash our cash at the push of a computer key, and from what I’ve seen on City dealing desks over the years, establishment they ain’t.

If you want to see what happens to a currency which has been openly  defended, refer to Brazil, Indonesia,Turkey, Nigeria or South Africa. All had finance ministers who effectively pleaded with the international money markets to please leave their currencies alone – a dialogue of the deaf ensued and they had to raid their reserves to survive. Some had to increase interest rates, which is not a good move in a weakening economy.

“The trouble is that this isn’t the rhetoric of a government in waiting.” says Michael Hewson at CMC Markets. “They’re actually acknowledging there’ll be a pushback on the their policies. For example they want to stay in the EU but nationalise big parts of the UK. Rules in the Single Market prevent state aid,  and would  in  any case make trade deals hugely complicated.

To defend sterling they’d have to increase interest rates and impose capital controls -and even that wouldn’t insulate you from a lack of confidence in the currency.’

Ironically when Tony Blair came to power in 1997, he and his Chancellor kept to Kenneth Clarke’s spending plans for the whole of the first term,

“They also carried out the so-called prawn cocktail offensive “, says Gerald Ashley, risk analyst at St Mawgan “but this Labour party has not, as far as I’m aware, had much contact with the City. Those sort of talks are essential for the markets not to lose confidence. Once that happens, there’s no easy way back.”



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