Dumb question

Gangaweed

Can someone please explain to a dumbo like me why when the economy tanks in normal times interest rates are cut but when the economy tanks post Brexit, interest rates are supposed to go up?

This is all too much for my little brain.

michaels

Gangaweed wrote: »

Can someone please explain to a dumbo like me why when the economy tanks in normal times interest rates are cut but when the economy tanks post Brexit, interest rates are supposed to go up?

This is all too much for my little brain.

Most recent jpm prediction is that a brexit vote would lead to an immediate cut in the base rate to 0.25% and a second cut later in the year. Has a reliable source without a vested interest suggest they would increase?

However this is now a purely academic argument since remain played their trump card.

Gangaweed

michaels wrote: »

Most recent jpm prediction is that a brexit vote would lead to an immediate cut in the base rate to 0.25% and a second cut later in the year. Has a reliable source without a vested interest suggest they would increase?

However this is now a purely academic argument since remain played their trump card.

Its been widely reported in various papers - even Carney claimed that interest rates would probably rise!

westernpromise

I would think that a falling £ would cause the cost of imports to rise, meaning higher inflation, meaning higher rates.

CLAPTON

westernpromise wrote: »

I would think that a falling £ would cause the cost of imports to rise, meaning higher inflation, meaning higher rates.

inflation alone doesn't usually mean rates will rise
it is wage inflation that usually causes interest rates to rise

Generali

westernpromise wrote: »

I would think that a falling £ would cause the cost of imports to rise, meaning higher inflation, meaning higher rates.

That's the theory, a falling pound would require rates to rise to support it.

Gangaweed

Generali wrote: »

That's the theory, a falling pound would require rates to rise to support it.

Funny then, that after the credit crunch in 2008/09 that when the pound fell, interest rates were cut, rather than raised, as has been promised by various stooges of the remain campaign.

Generali

Gangaweed wrote: »

Funny then, that after the credit crunch in 2008/09 that when the pound fell, interest rates were cut, rather than raised, as has been promised by various stooges of the remain campaign.

It depends how much the pound falls as to whether it needs defending. Nobody knows whether the Pound would fall or rise on a Brexit or by how much. I suspect a big fall although probably not enough to require an interest rise immediately.

Given that I can't say with any certainty what I'm having for dinner tomorrow I think it's reasonable to take my prediction with a pinch of salt.

Masomnia

The remain argument is that if we leave the EU [STRIKE]the sky will fall in[/STRIKE] there will be headwinds in the British economy and thus there will be a flight from gilts as everyone perceives the UK as a greater risk and everyone buys bunds instead. People selling gilts pushes up yields - interest rates rise.

Gangaweed

Generali wrote: »

It depends how much the pound falls as to whether it needs defending. Nobody knows whether the Pound would fall or rise on a Brexit or by how much. I suspect a big fall although probably not enough to require an interest rise immediately.

Given that I can't say with any certainty what I'm having for dinner tomorrow I think it's reasonable to take my prediction with a pinch of salt.

So with record levels of private and corporate debt interest rates are going to be raised to defend the pound? The Brexit budget was described as a scorched earth policy... raising interest rates to defend sterling sounds like utter stupidity!

Generali

Gangaweed wrote: »

So with record levels of private and corporate debt interest rates are going to be raised to defend the pound? The Brexit budget was described as a scorched earth policy... raising interest rates to defend sterling sounds like utter stupidity!

The UK is highly dependent upon imported fuel and food so the pound needs to be defended to some extent otherwise imports of these essential goods become too expensive. Also the UK has a large financial sector which, apart from consumer retail, is probably the most important sector in the UK's economy. I would imagine that at some point the pound would need defending to keep the wheels turning in financial services.

Your guess is as good as mine as to how much defending the pound would need, at what point that would happen and what defence would be used.

My guess is that a fall of up to about 15% would be simply tolerated. A larger fall would probably lead to some kind of coordinated action in the markets by the big Central Banks to defend the pound by currency intervention. If you can stabilise the currency and maybe wipe out a few big bets against the quid then that could stop the rot. If that didn't work and the pound was down more than 20-25% then I'd expect to see an emergency meeting of the BoE and a rate hike, probably one that's a lot more substantial than we've become accustomed to, say 1%.

Basically what needs to happen is to shock the market enough that big bets against the pound get expensive to hold. The only way for that to happen is if the pound starts to rise.

What are rather politely called 'portfolio flows', what you and I might call bets, massively dominate FX markets.