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Will The EU Referendum Force The BoE to Finally Move Base Rates?

A base rate move now looks more likely this year reports Peter Hemple

After seven years of stagnation, it might be considered somewhat daring to predict a base rate move by the Bank of England (BoE) but, such is the importance of the upcoming EU Referendum, it is now looking a possibility. However, rates could go up or they could go down. The June 23 referendum on EU membership is such a huge game changer for Sterling that whatever the outcome, moving the rates will very likely be necessary. To explain, let's consider the two possible outcomes (we will ignore the possibility of a draw).

We vote to stay in the European Union - time to move from ZIRP to NIRP?
This was still the most likely scenario at the time of writing, when the odds on the betting exchanges listed a 70% chance of staying and 30% chance of leaving the EU.

Also, recent research that highlights the dilemma for the Leave campaign came from the National Centre for Social Research, which found that two-thirds of the electorate is unhappy with Britain's current membership terms. However, when given a straight choice between Staying in or Leaving the EU, 60% thought Britain should stay in the union compared with 30% who believed the country should withdraw, with 10% undecided. If the poll is accurate then the betting odds have attributed the 10% undecided to the Stay vote, but either way the majority seems to be with Stay.

But with Sterling crashing to less than $1.40 at the end of February, a rate it has only hit once in the last 10 years, and that was at the height of the financial crises in 2009, a vote to stay in the EU is likely to result in a surge in the value of sterling, as many traders that had bet against the pound start to unwind their positions.

The Federal Reserve in the US sent shock waves through the financial system at the end of last year when it started its move away from ZIRP (zero interest rate policy) to PIRP (positive interest rate policy). However, in the Eurozone they have gone from ZIRP to NIRP (negative interest rate policy) and after several years of ZIRP, Japan has now also moved to NIRP.

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