Not only did the British pound plunge in the wake of Brexit, so have UK interest rates.
Traditional theory says central banks need to raise interest rates to stop a sinking currency. Russia is a good example of a country recently hiking rates to support the ruble.
Now, the market expects a rate cut from the Bank of England.
UK 30-Year Bond Yield Since 2003
British Pound vs. US Dollar Since 2003
Some newcomers may be wondering why up sometimes means lower and down sometimes means lower. It all depends on which currency is first. Note the chart says GBP/USD. Had it said USD/GBP up would have meant down.
I go with traditional currency trading pair nomenclature. Others invert the relationship so down looks down. In this case there is no need to invert anything. Down is lower.
Rate Hike Nonsense
Flashback March 2, 2016: The IBTimes reports Fears of Brexit vote triggering interest rate hike fuels mortgage activity.
Several investment banks, including Goldman Sachs and Citi, predict that a ‘leave’ vote will see investors flee and clip a fifth off the value of sterling, which has already fallen since Prime Minister David Cameron formally announced the 23 June date of the referendum.
The Bank of England is looking to raise its base interest rate from the all-time low of 0.5%, where it has sat since 2009, to stimulate the economy while it recovered from the financial crisis. Policymakers have so far held back because of concerns about the state of the global economy, in particular debt-laden emerging markets and turmoil in the Chinese stock market. But a run on the pound sparked by a vote for Brexit may force them into action sooner than they would have liked.
Oops. So much for that call.
Rate Cut Expected
Flash Forward June 27, 2016: The Wall Street Journal reports Brexit Vote Leaves Markets Primed for a Rate Cut From the Bank of England
Investors are expecting a rate cut from the Bank of England in the coming months, according to one key metric, following the U.K.’s unexpected vote to leave the European Union on Thursday.
The expectations come from the instantaneous overnight index swap (OIS) forward curve, also referred to as the yield curve, a measure published daily by the Bank of England. It’s one of the metrics used by banks to establish what they’ll charge each other for overnight lending, based on where they expect the Bank of England’s benchmark interest rate to be.
The OIS forward curve fell to 0.25% for contracts maturing in October this year on Friday, and 0.2% for those maturing in January 2017.
That suggests a 0.25 percentage point cut in interest rates from the Bank of England is now expected in the months to come.
No rate hike is expected until March 2021, almost five years from now.
Rate Hike Curve
Anyone recall chancellor George Osborne’s preposterous statement that he would raise taxes or cut spending by £30 billion if “Leave” won?
For details on the proposed idiocy of hiking taxes in a recession, please see Brexit Debate Focus Shifts to Chickens, Dead Cats, Taxes
Mike “Mish” Shedlock