The Bank of England and the Manipulation of Sterling

In a recent article where I discussed the Bank of England being at the heart of the Brexit process, I mentioned how the fall in the value of sterling following the 2016 referendum was pigeonholed by the bank as being the sole cause for inflation breaching their 2% target.

After the article was re-posted by Zero Hedge, a reader commented on something I did not make specific mention of, which was that six weeks after the referendum the BOE halved interest rates to 0.25%, prompting the pound to drop further in value. The reader pointed out that cutting interest rates usually results in currencies depreciating, and that the bank’s actions were the cause of a subsequent rise in inflation and not Brexit itself. Essentially, the premise here is that the BOE were responsible for devaluing the pound and creating the conditions to eventually raise interest rates a year later.

A similar comment from another reader in October last year spoke of how the BOE extending quantitative easing by £60 billion, as well as lowering rates, were ‘two sure fire things to lower the value of the pound.’

Whilst I have touched upon this in previous articles, it is a subject that deserves more attention and fresh context.

Let’s start by first going back to December 2007 when the Bank of England cut interest rates from 5.75% to 5.5%. At the time sterling was valued at $1.96. Two more rate cuts followed in February and April 2008, taking rates down to 5%. The pound remained stable around $1.97. So far the bank lowering rates had not prompted a fall in sterling.

Five months later Lehman Brothers collapsed, and so began a violent downward trend in interest rates. The next cut came in October, down to 4.5%. The chaos within financial markets had fed through to sterling – the $1.97 from five months ago was now $1.72. The BOE moved fast to keep cutting rates under the pretext of ensuring the financial system did not collapse. They trimmed rates in November to 3%, December to 2%, January 2009 to 1.5%, February to 1%, and finally in March to 0.5%.

In the space of fifteen months, rates had fallen by 5%. By the time the March cut was administered, the pound was at $1.41. For the rest of 2009, sterling traded between $1.50 and $1.70 – significantly below the high of $2.00 set on July 23rd 2008.

It should be pointed out that as the BOE were cutting rates, inflation was consistently above the bank’s 2% target for inflation. In the subsequent years following the cuts – notably from late to 2009 to late 2013 – inflation was again above remit. It reached a high of 5.1% in 2011. During this period, the high point for sterling was $1.70 set in August 2009. It otherwise traded between the $1.40 and $1.60 handle.

It was nine months after the last rate cut in March 2009 that inflation began a four year period of being over target. During this time the value of sterling rose, but remained far below pre financial crisis highs.

There is a correlation here of aggressive rate cuts eventually translating into a higher rate of inflation.

Next, let’s go back to the start of November 2015, when sterling was valued at $1.54. Steadily it began to fall as 2016 – the year of the referendum – approached. By the end of December it was $1.47. After falling to $1.38 at the end of February 2016 (a fall that was blamed on ‘Brexit related uncertainty‘), it then fluctuated in the $1.40 range up until the day of the vote.

On June 23rd – the day of the vote – sterling stood at $1.48. It’s value plummeted once the result of the referendum was confirmed. $1.48 became $1.36 in less than twenty four hours, a drop of over 8%. The pound remained highly volatile in the build up to the Monetary Policy Committee meeting at the Bank of England on August 4th (touching a low of $1.28 on July 11th).

After the day the bank lowered interest rates and pumped an extra £60 billion of new money into the financial system, sterling fell 1.65% to $1.31. Two months later, on October 11th, it was down to $1.20. It remained in the $1.20 range until May 18th, 2017.

Here we begin to see a correlation between the Bank of England’s actions and a further sustained fall in the value of the pound. As sterling traded in the $1.20s, inflation broke past the 2% target. A year after the 2016 rate cut and expansion of QE, inflation had risen by over 1.5%.

It was in September 2017, with inflation edging closer to 3%, that the Bank of England began telegraphing an imminent rise in interest rates. Sterling rebounded, touching $1.36 on September 18th. On November 2nd, the bank raised rates for the first time in a decade. Sterling was now firmly back in the $1.30 range, and broke past $1.40 on January 23rd 2018.

On April 17th, its value had reached a post referendum high of $1.43. It was here when BOE governor Mark Carney played down expectations of a interest rate hike in May. Sterling fell back below $1.40 and has so far not returned to this level. When the bank did raise rates in August, the pound remained weak following the BOE’s continued guidance that future rates would likely only be ‘gradual’ and to a ‘limited extent.’

Following the August rise, sterling fell back into the $1.20 range and has since been fluctuating between $1.26 and $1.32, with volatility being blamed on ‘Brexit related uncertainty‘ by the both the Bank of England and the financial press.

We have a situation now where despite the BOE having raised interest rates twice in twelve months, the value of sterling remains depressed. Whilst the media scapegoat the political uncertainty around Brexit as the cause of this, they have failed to recognise a wider trend at play. Communications from the Bank of England, and the words of its governor, Mark Carney, have had a direct impact on the pound. Managing expectations on the path of interest rates, along with stoking up the possibility of a ‘no deal‘ Brexit, has served to keep the currency volatile for an extended period of time.

What is interesting is that the bank’s communications have been reporting for a number of months that the effects of sterling’s 2016 depreciation on inflation are now subsiding. It is through the devaluation of the pound that the BOE have justified tightening monetary policy.

After the high of $1.43 in April, the pound quickly dropped below $1.40 following Mark Carney’s intervention that rates would not be rising in May 2018. Sterling has been below $1.40 ever since. The current price of $1.26 is over 11% down on the April high.

It is a gross over simplification to adjudge volatility in sterling as being solely based on the latest round of political theatre. The Bank of England have proven themselves highly capable of manipulating the trajectory of the pound based on their own communications.

As Britain moves nearer to leaving the EU – possibly under World Trade Organisation terms – the behaviour of sterling could once again have a significant impact on the rate of inflation. In the worst case ‘no deal‘ scenario, the BOE are signalling that the pound may drop as low as $1 – parity with the dollar. A consequence of that, according to the bank, would be inflation rising to over 6%. Prime conditions to carry on raising interest rates.

As discussed before, the global trend throughout the west is for monetary tightening, and to justify this by citing ‘inflationary pressures‘. Those keeping abreast of Brexit developments should not simply be paying attention to the political side, but also the economic ramifications. The longer sterling is devalued, the greater the likelihood of a resurgence in inflation and the rising cost of borrowing.


  1. Steven, could I ask you something? (Please excuse the lengthy comment.)

    Like yourself I’m from the UK and I’ve been an avid reader of Brandon Smith’s work for about two years. I found your blog through the comments section of his website.

    What I like about Brandon’s thinking is the predictive power it gives him. He predicted Brexit and Trump which was impressive and I believe he got those two right because he understand the big picture, namely the influence of globalists and how they intend to crash the system and take no blame for it.

    Speaking of making predictions I’ve been reading what you’ve written about the movement for this so called “People’s vote” – the machinations of Trilateral Lord Kerr and Tony Blair and so forth.

    A 2nd referendum really is starting to look likely now. The bookies have gone odds on, and the whole thing is starting to be framed as “May’s deal or no Brexit at all”

    While one would think the idea of a second vote should be dismissed out of hand (whatever happened to “no deal is better than a bad deal?”) it appears to be taken seriously. I watched 10 minutes of Question Time last night – I think I caught cancer in those 10 minutes – and David Dimblebore was raging for a 2nd vote, there were the usual planted audience members telling us that a second referendum was the “grown up thing to do” and so forth.

    A second referendum really does looks likely. I am starting to believe we will have one. And as they keep telling us, “Remain” would win a second referendum.

    This is where I am getting a little confused.

    Whether the UK stays in the EU or leaves the EU there is going to be an absolutely disastrous recession.

    How will the globalists blame the nasty nationalists if the UK remains in the EU?

    Could the the second referendum perhaps be a psychological device to whip everyone into an even bigger frenzy before we “Leave”. A bit of divide and conquer and general chaos. The thought of another referendum campaign is not a pleasant one !

    I think we have to leave else the globalists don’t get to blame the crash on Brexit.

    Mark Carney has practically blamed Brexit for the coming recession already.

    And your economic analysis is spot on. A no deal Brexit means sterling falls, which gives us inflation and the BoE an excuse to raise rates and crash it.

    The BoE has never predicted a recession before, like ever. Even in 2008 they said the odds of GDP contracting by over 1.5% was less than one in 20. Their track record is appalling. It is as bad as the Fed’s record – and they have predicted zero of the last 17 recessions and 14 financial panics. But Carney has already called this one AND pre-emptively blamed it on Brexit.

    Does having a bet on the UK leaving after a second referendum sound like a good idea to you?

    Or maybe we just leave without a second referendum? We “have to” leave the EU else the globalists don’t get to blame the nationalists. (I notice Tommy Robinson is UKIP’s little mascot now – the ugly face of Brexit if you like).

    The other thing that confuses me is that Blair is a committed globalist who gets paid a fortune by globalist bank JP Morgan. Yet Blair is such a rabid Remainer, which is odd for a globalist.

    Do you have an opinion on Blair’s actions and words?

    I’d be grateful for your thoughts.

    PS – good to see you got a piece up on Zero Hedge, nice one.

    Liked by 1 person

    • Thanks for your message freddiemays and your kind words.

      You ask a good question . Without the spectre of Brexit the Bank of England would be more open to scrutiny. This is one of the reason why I believe the UK will leave the EU under a ‘hard’ Brexit. A ‘soft’ Brexit scenario would likely still see the bank continue to raise rates (as indicated in their withdrawal scenarios document), but would not allow them the same level of protection from their actions.

      The UK economy is gradually weakening as the months pass. GDP growth is stagnating, car sales have collapsed over the past eighteen months, construction has contracted and been in recessionary conditions. The most visible sign of an impending downturn is the state of the retail sector – over 2,500 shops closed in the first half of the year. Insolvency rates amongst UK firms have risen to their fastest pace in nearly a decade.

      Raising the cost of borrowing into this degree of economic weakness will eventually precipitate a recession. I have believed for a while now that Brexit will be held up as a scapegoat for what’s to come.

      If the first referendum campaign was bad, a second would be much more bitterly contested. Notice that Nigel Farage recently severed ties with UKIP and is back touring the country promoting Leave Means Leave. A second referendum is taking shape before our eyes. It was Farage who said back in January that a second vote might have to take place. Look at how far the narrative has grown since then.

      As soon as the People’s Vote launched their campaign back in March, I believed it to be an indication of where events have been designed to go. When figureheads like Lord Kerr are spearheading it, it doesn’t sit right with me somehow.

      It would not surprise me at all if by the end of January a second referendum is officially in the works. If so Article 50 would be extended for a vote to happen probably in June.

      When the first referendum took place, it happened at the same time central bankers were gathering in Basel for the Bank for International Settlements annual conference. I have a sneaking suspicion that if a second vote takes place in June, it will coincide with the movements of the BIS once more. The fallout from a potential no deal exit would require close coordination between central banks, given that currency and equity markets would be pummelled.

      As for Tony Blair, I think the fact he is a committed globalist is indicative of his stance on Brexit. He called for a second referendum many months ago, and like Gina Miller and Justine Greening, said the option of a ‘clean break’ Brexit should be on the ballot. Apparently parliament cannot possibly countenance a no deal exit, yet offering this out to the electorate is acceptable.

      If leaving on WTO terms makes it onto the ballot, I think a hard Brexit is inevitable. Remain campaigners are so hyper focused on a remain option that they do not seem to realise what they are asking for in terms of a second vote.

      Liked by 1 person

  2. Thanks for taking the time to reply Steven, I really appreciate it.

    I shudder to think what a second round of campaigning will be like. I might have to hide for a few months.

    As Jacob Rees-Mogg said to an interviewer this week – if he thought Britain was divided now, and that worried him, then the absolutely worst thing would be to have a second referendum.

    You make a good point about allowing the public to potentially choose “no deal” on the ballot paper when the government can’t possibly countenance it !

    Any economic malaise will then be the “fault” of the “stupid racist old uneducated northern etc etc” public for sure.

    Blame will be categorically shifted to Brexiteers, with Remainers bleating that we should have listened to that nice man Mark Carnage from Goldman Sachs, I mean the Bank of England. I can almost see it unfolding in slow motion.

    Liked by 1 person

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