September 28, 2018 / 1:27 PM / 24 days ago

BoE's Ramsden sees investors insuring against 'downside' Brexit

LONDON (Reuters) - Bank of England Deputy Governor Dave Ramsden said on Friday he saw signs that investors were increasingly insuring against “downside” Brexit outcomes, although these moves were small in comparison to before the Brexit vote.

The Bank of England is seen in the financial district during rainy weather in London, Britain, September 23, 2018. REUTERS/Henry Nicholls

With six months before Britain is due to leave the European Union, London has yet to clinch a divorce deal with Brussels and there remains the possibility of “no deal” Brexit that most economists think would damage the economy.

So far the BoE has stuck to the assumption of a “smooth” Brexit that underpins its forecasts, but Ramsden noted that a “range of outcomes for Brexit are clearly still possible”.

“Consistent with that it is noteworthy that option pricing implies that market participants are insuring to a greater degree against tail outcomes,” Ramsden said in a speech to the Society of Professional Economists at Bloomberg’s offices in London.

He pointed to the fact that sterling risk reversals — a measure often used to gauge investors’ views on a currency — had fallen to their lowest levels in over a year, suggesting a “greater increase in relative weight on downside outcomes”.

“But the moves are still small relative to those we saw ahead of the (2016 Brexit) referendum.”

Ramsden also said he saw signs that the labor market was tightening and that pay pressure was rising in line with the BoE’s latest forecasts published in August.

There was still a chance that productivity and wage growth would disappoint the BoE again, as it had done for many years since the financial crisis, Ramsden said.

“(Even) in that case it seems likely to me that, given the gradual move into excess demand that we expect, unit labor costs and inflationary pressure would still pick up as in our August forecast,” Ramsden said.

Reporting by William Schomberg, writing by Andy Bruce; editing by Kate Holton

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