Ben Chu| The Independent | Jun 25, 2016, 06.54 AM IST
Following the Brexit verdict, pound is depreciating at an unprecedented rate
If the currency does not stabilise, it can trigger a massive domestic inflation
The Bank of England might be forced to raise rates, pushing the economy into recession
The votes are in. And the result is a political earth quake. But what does it mean for the economy? What does Britain leaving the European Union mean for UK's prosperity and standard of living? The answer is that it is impossible to say with any uncertainty .
In the short-term there is a danger of financial panic . Sterling is falling through the floor. UK's current account deficit (the difference between aggregate national spending and income) stand at around 7% of GDP. That's something that implies the pound could fall a very long way indeed.
If the currency does not stabilise, domestic inflation could explode, forcing the Bank of England to raise rates and pushing the country into a recession, which will cost jobs, reduce incomes and damage living standards .
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A rout of the pound could also conceivably set off a run on UK financial institutions , which have trillions of pounds of sterling liabilities. Expect a statement very soon from Bank of England promising to provide financial institutions with all the short-term sterling "liquidity" they need.
The European Central Bank, the US Federal Reserve and other major central banks around the world are also likely to make similar pledges to provide banks and other large financial institutions around the world with all the short-term lending they may require.
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