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
Osborne Revisited
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
Cutting rates as your currency declines.
This is how fiat currencies find their way to “money heaven”.
Lower prices actually stimulate DEMAND. When a currency falls relative to the dollar or euro, everything gets cheaper in that currency. The U.K. will become an affordable vacation destination to the world.
WTF?!?
And yeah, everyone from around the world will soon be flocking to vacation in the UK to enjoy the beautiful weather.
I would like to try whatever it is you are smoking/drinking.
BINGO. Plus UK exports should zoom up
.
Can’t get UK history or culture anywhere else in the world.
Maybe I can visit Economist Square and John Maynard Keynes’ London home!
Germany and France cannot compete with weak pound sterling exports. The UK is a significant exporter to EU. The pressure is on EU for 2.25 years to settle the split amicably and rapidly or lose a pot load of GNP to UK. Low interest rates in UK are thus strategic and sound logic.
Mish
I’m an avid reader of your posts. And in these uncertain times i wanted to share with you a funny thing that happened to me this evening to show that life goses on…. i’m on vacation with my wife at Bethany Beach Deleware. After a very nice dinner of crab legs, we decided to walk the boardwalk and we were walking amoungst numerous store fronts. A short while later, two young ladies walked in front of us. One of the women had on white guaze pants. My wife commented “she doesn’t have any underwear on”.. i commented, ‘I think she’s wearing a thong’. As i was studying the two tan soccerballs fighting under the guaze pants, she and her friend exited into a shop. I commented to my wife “well, i just had desert”. Two steps later we were greeted with a pink pig, going “oink, oink, oink”. My wife commented the timing couldn’t have been more appropriate.
Life goes on
I couldn’t’ see how to send you a direct email, so i am posting here
Rich – that’s funny!
Russia has no rule of law and certainly not history of abiding by contract law…so you buy Rubles and you get what you pay for. Obviously the exact opposite is true in Great Britain…to the point where they had a Global Empire financed by a gold standard remarkably. Fast forward to today and there certainly is no shortages of Wars in the European region. That’s very bullish for debt for those with a strong belief in contract law…but indeed the Pound is getting pounded here. At some point the market will force some type of “compliance” with the economics…but it can be a long time before such discipline can happen. The US dollar and Japanese Yen have surged … not good news for Europe, China or Russia who have failed to devalue their way to prosperity. Maybe Britain will be different but so far things look pretty bad. They can still borrow vast quantities at very low rates however. With “hard assets” save gold and silver now deflating some VERY low prices could start appearing in the USA for…pretty much everything. The USA and Japan remain the only two politically stable open markets with a strong belief in the rule of law. So far equities have held up well in the USA but not so Japan. You could see a massive American Army suddenly appear on the European “battlespace” rather quickly if the EU devolves say…in a matter of weeks.
It is after all just a currency Union.
Keynesians don’t recognize “recessions”…just as they don’t recognize “misallocations of capital”. It’s all about gross numbers. ALL spending is good to them…
I would have thought the BoE needs to raise IRs. Which muppets are holding UK Gilts other than the BoE. ? They are hardly being rewarded
Also no-one seems to talk about the massive benefit the UK has just received, in that our GBP 1.5Trillion National debt has just been reduced by 10% in real (USD) terms. Is this not what every country in the world has been recently desperate to achieve.
Pension funds, banks, small investors. They’re getting rewarded more than in Germany, Japan or Switzerland and more than most savings accounts these days.
And if you use that logic, the UK’s economy is now 10% smaller too.
Floridians in the US are already worrying about fewer British tourists this fall, and business travelers around New York City are already planning on cheap USD equivalent costs in London. Then again, the first reaction is often wrong.
Much like interest rate manipulation in the USA is utterly pointless, even counter-productive… England needs to focus on expanding trade agreements with former common wealth countries, Switzerland, and getting the 3yr olds in Brussels to give UK the same Swiss trade agreement. England needs to focus on Russian oil deals, getting more agriculture products from South/Latin America.
Pretending that higher (or lower) interest rates are going to solve anything is just absurd.
No rate cut coming. No rate hike coming. Adults are fed up of listening to stupid Keynesian clap-trap