Why Interest Rate Cuts Increase Shares and Devalue Sterling

Why Interest Rate Cuts Increase Shares and Devalue Sterling?

Today, we saw Bank of England Governor, Mark Carney, suggest that interest cuts from 0.5% to an even lower were imminent.

Markets reacted with currency i.e. sterling exchange rates falling even further and stock markets rising. 

Why Do Interest Rate Cuts Increase Shares and Devalue Sterling?

If interest rates are lower, investors will not buy sterling as the return they get is too low.  As a result, demand for the pound reduces i.e. the pound weakens against other currencies.

If interest rates are lower, the cost of borrowing for businesses lowers meaning more profit, i.e. demand for shares for higher dividends increases.

If interest rates are lower, sterling has weakened meaning British goods and services are cheaper overseas i.e. we will export more which is good for UK business, profits and share prices.

If interest rates are lower, sterling has weakened meaning it is cheaper for foreign visitors to come to the UK and spend more.  Tourism accounts for around 9% of UK total GDP (income).

Comment

A shrewd speech Mr Carney with, no doubt, the desired effect.