Pound drops 1.5% against the dollar following interest rate cut

As the FTSE 100 Index gained 1.6% following the Bank of England’s stimulus package on 4 August, the pound slid 1.5% against the dollar.

So, what provoked the plunge? After all, economists had been predicting the quarter point rate cut so vigorously that many lenders had already incorporated it into their pricings. The slide was almost certainly a result of the additional measures, which surprised most observers and were considered a step too far by some.

The Bank is usually cautious to avoid triggering any volatility in the markets, so a vote of such low confidence in the UK economy was significant, as much for being out of character as for the heavy portent in the message.

The Bank’s Governor, Mark Carney, later insisted that he felt the UK economy was open and resilient enough to cope with the effects of slowing growth, higher inflation and other consequences of the Brexit vote [1].

So it could be that the Bank is laying the ground for a period of belt-tightening to be announced by the new government. Plenty of credit lines are now open, and the Bank has intimated that there could be further rate cuts before the year end, so it only remains for the politicians to stimulate demand for this credit.

Many mortgage holders will be happy with yesterday’s changes; corporate bonds have enjoyed a further £10bn boost, and we are assured that a recession has been averted. So once the market’s initial perplexity has dissipated, it looks as though there may be several reasons to be cheerful.

[1] Financial Times “Carney issues stark warning with package to ease Brexit downturn”