In this article, members of the Scottish Currency Group (SCG) continue their series explaining how a separate Scottish currency can be introduced soon after independence, and the implications for the Scottish economy, Scottish Government, businesses and households.

The article reflects SCG views on the policies which the group believes should be adopted in the future.

Will prices go up when the Scottish Pound is introduced?

PRICES should stay the same. At the start, one S£ will cost GB£1, so unlike decimalisation in 1971 there is no need for any shop to change the shelf prices or get a new till, nor do restaurants need to reprint the menus. Only your notes, coins, and cards will change.

Will the Scottish Pound be worth as much as the British one?

IT will initially be valued (pegged) to the same value as the £ sterling. The exchange period will probably last two to three months and is the time for people to decide what to change into the S£ and to sort out the repayment of any GB£ loans, such as mortgages.

During this period the Scottish Reserve Bank will buy and sell S£ as required without any fees at a one-to-one rate. When it ends, the official Foreign Exchange market will open and conversions from GB£ to S£ will be subject to a fee.

It is proposed to have a system of gradually widening managed bands, so for example the S£ kept to +/- 1% from the GB£ for the first month, then maybe +/- 2%, and so on until a “free float” is achieved after maybe a year.

What about the risk of future devaluation of the Scottish Pound against other currencies?

AS with any currency traded on international foreign exchange markets, there could be upward and downward fluctuations in the external value of the currency.

For example, the UK £ sterling has depreciated significantly against the US dollar and the euro since Brexit.

There are always winners and losers when exchange rates change. Depreciation makes Scotland more competitive and stimulates exports. Appreciation makes foreign trips and imports cheaper but penalises exporters. Over time, the exchange rate will reflect the strength of the Scottish economy.

It may be that sterling will continue to depreciate. The Scottish Government could then stabilise the exchange rate with other currencies by allowing the Scottish Pound to float against sterling.

Background information:

The Scottish Central Bank will have a mandate from the Scottish Government to prevent undue instability in exchange rates.

It is expected that the Scottish Pound will be allowed to “float” against other currencies after an initial exchange period – to be determined by the elected Scottish Government - during which it will be fixed (pegged) against the GB£ sterling at 1:1.

During the initial official fixed exchange period, and after that, when the Scottish Pound is allowed to “float”, the Scottish Central Bank will have holdings of foreign currency which may rise or fall in value. It can use its FX holdings to intervene in the FX market to prevent any undue instability.

Equally we (people and organisations) will have a currency risk to the extent that we retain sterling deposits in our old bank accounts (located in the rUK part of our bank), leave our mortgages and loans in sterling, or remain in receipt of a pension paid in sterling.

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A public information campaign will educate us about those risks and ensure we can take suitable action in good time if we wish to do so.

Many people may choose to leave their arrangements as they are, perhaps keeping a sterling loan because they also have a sterling income (eg a pension or share dividends).

The more adventurous might choose to speculate that the Scottish Pound could rise against sterling, but that is not recommended for anyone without a clear understanding of the risks and a willingness to accept that could cause a loss just as easily as a gain.

It has been claimed that the Scottish / rUK commercial banks will face a large foreign exchange risk. THIS is not true. Most foreign exchange transactions are managed by businesses, and banks. They already have systems in place to manage exchange rate risk.

Background information:

Banks currently operating in Scotland and rUK will have to divide into a Scottish bank and an rUK bank after independence.

Scottish Pound customer deposits and new loans and mortgages in Scottish Pounds will be entirely in the Scottish Bank.

The old sterling deposits and old sterling mortgages and loans will be entirely in the rUK Bank. The balance sheets in the rUK banks will fall (as customers switch funds into the S£) with no mismatch between assets and liabilities. The balance sheets in the Scottish banks will rise, again with no mismatch between assets and liabilities.

There is nothing owed from the Scottish Bank to the rUK Bank, or vice versa. If there is nothing owed, then there is no foreign exchange risk.