UK Interest Rates and the Danger of Crowds, Socionomically

It’s been dubbed as “Super Thursday,” the day that “Charmer Carney” and his fellow “market manipulators” at the Bank of England monetary policy committee are set to cut UK interest rates.

At least it appears to be a “slam dunk” according to 45 of the 47 economists that Bloomberg surveyed days ago, with the majority of them expecting a 25 basis-point reduction to 0.25% and possible other measures such as more QE or a lengthening of the time taken to return inflation to the 2% target.

Furthermore, a separate Bloomberg report shows that Hedge funds and other large speculators have the most bearish bets against the pound since records began in 1992.

On both fronts, a Socionomist would observe these as “sentiment extremes,” with everyone on one side of the boat!

Here are a couple of observations and thoughts:

 Throughout numerous postings I have made the point that Central Bankers, including the Bank of England, have never made a pro-active decision in their collective lives, they re-act to market rates, the rate set by you and I and anyone else out there who has a decision to make on either lending or borrowing £Sterling and/or looking to make a currency exchange transaction.

Exhibit 1:

3 August 2016

As can be observed above, whilst the base-rate has held at 0.5% since 2009, the 3-month £GBP money-market rate and the 2-year interest rate have “waxed and waned,” dependent of the market perception and have both “bottomed,” in the case of the 2-year back in 2012 since when the rate has risen by 150%. Furthermore, the “inflation rate,” is turning higher, albeit that it is still far from the 2% pa target that the Bank of England has missed for most of the past decade.

As for the British pound “bearish extreme” consensus:

Exhibit 2:

3 August 2016 2

Here is shown the £/$US exchange rate, monthly data points which show a high of 2.1 back in 2007 and the 1.28 post-brexit low of late June 2016. The trend-channel highlights where the British Pound has spent most of it’s time over the past nine-years, and for sure it has been super-weak since the secondary high of 2014.

 

If anything, in the very short-term, which these surveys relate to, I would expect a bounce towards the 1.40 level, the bottom of the channel, rather than further weakening, as the herd are expecting.

So there we have it, crowds are usually wrong when it comes to financial forecasting, but of course when itcomes to the Central Bank, politics are involved, regardless of its purported “independence.”

 
We’ll find out tomorrow!

 

 

 

 

 

 

 

 

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