Run on the pound definition
What is a run on the pound?
A run on the pound is a situation of increased nervousness towards the value of sterling and sterling-linked assets, including UK government bonds. In such a scenario, investors and traders quickly begin to sell their assets to limit losses, causing the price of the pound to decline rapidly.
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Consequences of a run on the pound
Consequences of a run on the pound often include a decline in the strength of the pound, and a reduction in the price of UK stocks, bonds and funds.
This could affect the UK economy as a whole, unless measures are taken to combat the effects of a run on the pound. One method of doing so is for the British government to sell foreign currency reserves in exchange for pounds, which would reduce the supply of sterling in the global economy. In turn, this would increase the price of GBP, assuming demand remains constant.
Other measures that the British government could take include increasing interest rates or reducing inflation rates. Both of these options will serve to strengthen the pound and hopefully cause it to rise in value compared to other currencies.
Run on the pound example: Black Wednesday
An example of a run on the pound is Black Wednesday, which occurred on 16 September 1992. This was a result of the UK government withdrawing from the European Exchange Rate Mechanism (ERM), after it failed to maintain a peg of between 3.13 to 2.78 Deutsche marks to the pound.
The day before Black Wednesday, traders – including the infamous George Soros – began to sell their sterling positions, which caused the price of the pound to fall below the lower limit of 2.78 Deutsche marks. As a result, the UK government withdrew from the ERM, and Soros became known as ‘the man who broke the Bank of England’ thanks to the fallout of the dramatic decrease in the value of sterling.
Effect of UK politics on the value of the pound
A run on the pound has happened under both a Labour and a Conservative government, most notably in 1967 and 1992 respectively. However, historically investors have been more nervous about the economic policies of Labour governments when compared to their Conservative counterparts.
In 2017, John McDonnell – the shadow chancellor – was preparing for a run on the pound in the event that Labour won the 2017 UK general election. And as part of Brexit planning, political parties acknowledged that there could be a run on the pound after the UK’s departure from the EU.
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