Sterling will drop by 20 per cent in the event of the UK leaving the European Union, presenting a “significant shock” to the UK economy, predicts the National Institute of Economic and Social Research.
The think-tank predicts that in the event of a Brexit the drop in sterling would continue over the longer term, reaching parity with the euro by 2030.
Sterling price has dropped in the run up to the referendum, with the euro now trading at £0.787.
Such a drop in sterling would push up inflation by between two and four percentage points in the short term, says NIESR.
The think-tank also predicts in a Brexit scenario that GDP growth will be 0.8 percentage points lower than in the Remain scenario.
“A decision to leave the EU would represent a significant shock to the UK economy,” the report states.
“This shock would be likely to manifest itself through a number of channels, some of which might be expected to be relatively short-lived, predominantly affecting the near-term outlook. Others, such as the reductions in trade and foreign direct investment, would represent more permanent structural changes to the UK economy, and so would have important long-run implications.”
The report adds that in the short term, the current high uncertainty in the markets are likely to “persist, if not intensify”.
“It would also seem reasonable to expect an increase in credit premia across the economy, raising the cost of borrowing for the government, businesses and households,” the report states.