Why did the pound fall after Brexit?

Today the pound has seen the largest decrease since records started in 1971.  This has been caused by panicing financial markets in reaction to the UK voting to leave the European Union. The drop has been even larger than the collapse of Lehman Brothers and the drops seen on Black Wednesday. The pound fell as low as $1.32, which is more than 10%, from the $1.50 it achieved the day before.

 

Things got even worse after Prime Minister David Cameron announced his resignation.

Naeem Aslam, chief market analyst at Think Forex, said: “It is vile and ugly out there, the British pound is facing its worst day ever. Investors were not prepared for this and this is what you get when you have pre-mature celebrations.”

“Although, some bookies have started to call it game over with 91 per cent of chances of Brexit, it is not over until it is over. Some big cities are still going to report and it there where we can see the change,” he added.

Experts previously said that the pound could fall to equal value to the euro, while HSBC predicted it would tumble by 20 per cent.

So what should we does this mean?

The most helpful tool for economic ball-gazers is the value of sterling. Most of them expect the value of the pound to take a significant hit in the medium term. It certainly fell sharply as it emerged that the UK was to leave the EU – at one stage down 10% to its lowest level since 1985.

That is likely to mean:

  • buying goods or services from other countries will become more expensive
  • inflation will therefore be higher
  • goods being sold to other countries will become cheaper for the buyers

A rise in interest rates would affect those with mortgages and those in rented accommodation, as costs for landlords would go up.

But amid fears that the vote for Brexit heralds a period of low growth, some economists are suggesting the Bank of England will cut interest rates. In which case, the cost of lending could actually fall. David Tinsley, UK economist at UBS, said he expects two rate cuts from the Bank of England over the next six months, taking interest rates from a current record low of 0.5% to zero.

What should we do?

Now for some good new. Don’t panic. It is very likely that the pound will climb again. We are not sure how long this will take but the reason for the fall comes down to the uncertainty of life outside of the EU.