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Scottish independence and the pound


This week has seen the pound drop dramatically after a YouGov poll announced that ‘Yes’ voters had the advantage for the first time.

As complacency over the future of Scotland and the United Kingdom has been shaken up, the currency markets have reacted in panic as investors seek to protect themselves from the consequent uncertainty a split will bring. The big question now being faced by politicians and market traders alike is - in the event of a ‘Yes’ outcome; what currency will Scotland use and what will be the impact on the pound?


Alex Salmond has stated that it is his intention to strike a deal for Scotland’s continued use of the pound – however establishing a currency union will not necessarily allow the pound to recover as ambiguity surrounding the financial stability of an independent Scotland will continue to deter international investors. Alistair Cotton, currency expert at Currencies Direct explains – “The poll over the weekend showing both camps neck and neck saw a stampede of investors heading for the exits and a four cent drop in Sterling against the dollar. Foreign investors will not stand idly by with the prospect of a large scale fall in the pound on the horizon, they have to protect themselves by moving funds elsewhere.” The plot thickens further still as the Bank of England and Westminster deny the possibility of a currency union on the grounds that Scotland will have to relent newly gained sovereignty in order for monetary policy to be consistent across both countries.

Scotland cannot, however, be denied use of the pound. They could continue the use of the currency independently in a move that is being termed ‘sterlingisation’ after the example of countries like Panama who have adopted the use of the US dollar. Mark Carney has voiced concerns over this approach to the currency question – raising the point that an independent Scotland would not have the use of the Bank of England as a lender of last resort and would need to raise billions of pounds worth of currency reserves to make this a credible arrangement. This is a shortfall that will impact greatly on interest rates, taxes and the return people will see from their savings and pensions. Indeed this week we have already seen announcements from financial institutions RBS and Lloyds group that their ‘Yes’ vote contingency plans are to move operations south of the border under the protection of the Bank of England and UK financial regulators.

In either event we can expect to see the pound taking a hit. The prospect of prolonged negotiations will create a period of volatility in exchange rates and encourage capital flight.


But what can we expect to happen to the pound as a result of a ‘No’ vote? Alistair Cotton predicts that “Scotland remaining part of the union will see the outflows from Sterling reverse and we should end up back where we started, if a little shaken up by the whole ordeal”. Today’s rates seem to be sending the same message. A new poll released on Wednesday showing 53 – 47 in favour of ‘No’ has already given Sterling a boost of 1 cent against the dollar. In the event of a ‘No’ we could see the pound continue on its upward trend that was reaching 5 year highs against the dollar and euro only months ago.

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