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UK's NIESR sees 20 percent slide in sterling if Britain leaves EU

LONDON (Reuters) - Britain’s currency is likely to lose a fifth of its value if the country votes to leave the European Union on June 23, triggering intense inflation pressure and slower economic growth, a leading think-tank said on Tuesday.

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration

The report by the National Institute of Economic and Social Research adds to a string of warnings from Britain’s finance ministry and international bodies about the costs for Britain of leaving the EU.

But unlike other forecasters, NIESR explicitly predicted a big fall in sterling and a knock-on jump in inflation which would hurt the spending power of workers.

Inflation in 2017 could be as much as 3.8 percentage points higher than it would be if Britain stayed in the EU, while the economy would be 1 percent smaller in 2017 and 2.3 percent smaller by 2018 than otherwise.

“Heightened risk and uncertainty will cause sterling to depreciate by around 20 percent immediately following the referendum, which will result in an intense bout of inflationary pressure,” the academic body said.

Opinion polls have generally shown British voters think the economy will fare better if the country stays in the EU but they remain evenly divided on their voting intentions.

By 2030 a post-Brexit British economy was likely to be 1.5 to 3.7 percent smaller than if it stayed in the EU, depending on what trade deals it struck, NIESR said. The hit could be bigger once lower productivity and less migration were factored in.

Adjusted for inflation, wages were likely to be between 2.2 and 6.3 percent lower.

NIESR’s short-run forecasts were similar to some of the more pessimistic ones from U.S. banks such as Goldman Sachs and Citi. Its main long-run forecasts are less downbeat than those of Britain’s finance ministry.

While most economists agree that Brexit would damage Britain’s economy in both the short and long run, a minority see net medium-term gains from scrapping EU regulation, tariffs and membership fees.

Like the finance ministry, NIESR assumed that even if Britain left the EU, migration would continue at the same rate as forecast by Britain’s statistics agency last year.

If migration slowed - as many Brexit supporters hope - NIESR said preliminary research suggested the average Briton would be worse off, due to lower growth in the economy per capita, and would also need to shoulder a heavier tax burden.

Editing by William Schomberg