Saturday, 17 August 2013

GBP versus UK ten year gilt yields

Just for fun, here are charts for the last ten years showing:

a) The yield (interest rate) on UK ten-year government gilts (click chart for up to date version),

b) GBP (£ pound sterling) against a basket of the main currencies.

There seems to be quite a strong correlation, doesn't there?

The simple explanation for this is that people want to invest in currencies where they can earn more interest, so when our interest rate goes up, investors and speculators pile in, and when it falls, they all abandon ship.

It is relative interest rates which matter, i.e. if interest rates around the world are 5% and a country drops it interest rate to 1%, then people will take their money out of that country/currency.

But interest rates move pretty much in tandem all over the world. Since the "financial crisis" most central banks have been paying less then 1% interest on short term stuff. And if interest rates around the world were 5% and they all dropped their interest rates to 1%, then this has no particular impact on currency flows or currency levels. Why does it have such a strong impact on GBP?



8 comments:

paulc156 said...

Circa 2008 Gordon Brown et al deliberately fashioned a fall in sterling to counter the slump. We dropped our rates faster then the ECB who sill haven't caught up. We adopted QE whilst Europe didn't. Prior to 2008 we were more or less in sync with Europe.

Mark Wadsworth said...

PC:

"Circa 2008 Gordon Brown et al deliberately fashioned a fall in sterling to counter the slump."

Agreed.

"We dropped our rates faster then the ECB..."

Agreed.

"... who sill haven't caught up."

Oh yes they have.

"We adopted QE whilst Europe didn't."

Of course they have QE, it's just called something different, Sarkonomics or whatever. And the Yanks have much more QE than we do.

"Prior to 2008 we were more or less in sync with Europe."

Probably, although in terms of what?

paulc156 said...

You're right, ECB rates are now at 0.5%, same as BoE. Although I'd forgotten that early on in the crisis the ECB actually raised rates and did so again in 2011 whilst everyone else was lowering them.

"Of course they have QE, it's just called something different, Sarkonomics or whatever."

The ECB have conducted so called 'extraordinary' monetary measures but they are not really the same as QE.Their measures were mainly determined by the demand for funds [banks] and not by its supply [ECB]. Hence, the ECB was not proactively deploying monetary policy to stimulate demand. EMU money base only started expanding at all late in 2011 over two years after the UK and US.Their measures were sterilised for the most part.

"Yanks have much more QE than we do."

Only in absolute terms. Not relative to the size of their economy they don't.

Mark Wadsworth said...

P: "Only in absolute terms. Not relative to the size of their economy they don't."

Actually it's "about the same".

Their economy is five times as big as ours and £1 = $1.60, so we can divide their figures by 8 to put it to scale.

Total UK QE £375 bn.

Total USA QE according to Wiki looks like about $3,000 billion.

3,000 divided by 8 = 375

Lola said...

It's a giant fuck up whichever way you look at it.

Luckily 'they' will all be stuffed by 'the markets' (i.e. you and me) eventually. But that'll be bloody and 'they' will blame 'the markets' - i.e. you and me.

You just can't win can you?

Bayard said...

L, what do expect "them" to do? Fess up and say "we got it wrong"? Hell freezing over, flying pigs etc. spring to mind.

Lola said...

B. Quite

Mark Wadsworth said...

PC, actually I take it back, you were right, in relative terms, QE was bigger in the UK

source.

L, let's hope so.

B, I expect nothing of the sort.