London hikes currency reserves amid Brexit risk

GMT 13:27 2016 Tuesday ,09 February

Arab Today, arab today London hikes currency reserves amid Brexit risk

Britain's foreign exchange reserves
London - AFP

London has ramped up its foreign exchange reserves in a move described by British media on Monday as a war chest against market chaos should Britain leave the European Union.

Currency reserves jumped 34 percent to $98.2 billion (87.9 billion euros) in January 2016, from $73.4 billion for the same month a year earlier, according to recent data from the Bank of England (BoE) -- which manages the Treasury's foreign exchange funds.

The nation's emergency "war chest" has been ramped up to guard against a "disorderly collapse" in the pound and equity markets if Britons vote in a key referendum expected later this year to leave the European Union, The Times newspaper said on Monday.

The reserves are mostly held in dollars.

However, both the BoE and the government declined to comment on why the currency reserves have risen so rapidly over the past year.

"We do not entirely know what the government intentions are," said Scott Corfe, economist at the Centre for Economics and Business Research.

"But that certainly can be one explanation -- accumulating currency reserves as a precaution -- because there would be some volatility in the event of Brexit," Corfe told AFP.

Economists warn that the pound could potentially collapse by 20 percent in value, in the event of a British exit.

"Faced with a Brexit, we would expect the authorities to welcome a weaker pound," said David Owen, chief European economist at Jefferies.

A weaker British currency would likely boost the nation's exporters because it makes their goods cheaper for international buyers using stronger currencies.

"The key thing here is see a managed depreciation of sterling -- with the (Treasury) still able to successfully issue gilts, rather than something more of a rout," Owen warned.

Support for Britain leaving the EU has risen since Prime Minister David Cameron unveiled plans for a deal to keep the country in the bloc, a poll showed Friday.

The survey showed 45 percent now wanted to leave the EU, ahead of 36 percent who wanted Britain to remain in the 28-member club.

That marked a three point rise for those in favour of a so-called "Brexit" since a poll taken a week earlier.

Cameron has set a deadline of the end of 2017 to hold a referendum on whether Britain should stay in the EU, but sources say he is keen to push a vote through by June.

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