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I don’t understand why it is that the hike in interest rates had to fail. Had the speculators bought tied up so much liquidity that nobody had pounds to sell to

I don’t understand why it is that the hike in interest rates had to fail. Had the speculators bought tied up so much liquidity that nobody had pounds to sell to the UK’s central bank?

AnimalMuppet 7y ago
This would be hiking interest rates while the UK was in a recession. That would be devastating to employment in the UK, and was therefore politically not possible. [Edit: Per the article, they did try raising the interest rates, but by then everyone knew that the outcome would be devaluing the pound, so it didn't work.]
singingboyo 7y ago
I think you've got it backwards. If no one is buying and everyone is selling, the value drops. The central bank couldn't sell back the pounds it had bought, and couldn't feasibly keep buying more forever. And, well, no one else would buy pounds in the fixed range: * The currency spent the morning dropping in value. * This despite the government buying up pounds. * There had been news stories about possible devaluation of currencies in the ERM, and suggestions it will be the pound * The country was in recession - the government has limited flexibility with interest rates. Against this backdrop, who would buy pounds? Essentially, as the article notes, it was already a matter of when the pound would drop, not if. Soros' Quantum Fund and other funds might have made it happen a bit sooner, but it was pretty clear that the pound was overvalued.
- viburnum 7y ago
  I think that’s begging the question, though. They could have fought it out, like the Volcker shock in the US from just a few years earlier. Maybe everybody assumed they wouldn’t do anything as dumb as that.
whack 7y ago
Hiking up the rates from 10% to 15% gets you an additional 5% in returns over the course of the next year. Whereas if the English government decides to stop propping up the currency, you're going to see a significant loss, within the next few days or weeks. Which is exactly what happened in this case. Anyone who bought pounds in order to lend it at 15%, would have taken an immediate 15% loss over the next week instead. Unless you want to speculate, you're better off waiting for the market to settle instead of diving in during turbulent times.
lordnacho 7y ago
This move often fails because you can never hike the rate enough, since you don't want to hurt borrowers. In other words, you have competing motives that don't reconcile. It's also often seen as a desperate tactic, the kind of thing that is done right before capitulation. Which of course makes it even less likely to work.

I don’t understand why it is that the hike in interest rates had to fail. Had the speculators bought tied up so much liquidity that nobody had pounds to sell to the UK’s central bank?

AnimalMuppet 7y ago

This would be hiking interest rates while the UK was in a recession. That would be devastating to employment in the UK, and was therefore politically not possible. [Edit: Per the article, they did try raising the interest rates, but by then everyone knew that the outcome would be devaluing the pound, so it didn't work.]

singingboyo 7y ago

I think you've got it backwards. If no one is buying and everyone is selling, the value drops. The central bank couldn't sell back the pounds it had bought, and couldn't feasibly keep buying more forever. And, well, no one else would buy pounds in the fixed range: * The currency spent the morning dropping in value. * This despite the government buying up pounds. * There had been news stories about possible devaluation of currencies in the ERM, and suggestions it will be the pound * The country was in recession - the government has limited flexibility with interest rates. Against this backdrop, who would buy pounds? Essentially, as the article notes, it was already a matter of when the pound would drop, not if. Soros' Quantum Fund and other funds might have made it happen a bit sooner, but it was pretty clear that the pound was overvalued.

viburnum 7y ago
I think that’s begging the question, though. They could have fought it out, like the Volcker shock in the US from just a few years earlier. Maybe everybody assumed they wouldn’t do anything as dumb as that.

whack 7y ago

Hiking up the rates from 10% to 15% gets you an additional 5% in returns over the course of the next year. Whereas if the English government decides to stop propping up the currency, you're going to see a significant loss, within the next few days or weeks. Which is exactly what happened in this case. Anyone who bought pounds in order to lend it at 15%, would have taken an immediate 15% loss over the next week instead. Unless you want to speculate, you're better off waiting for the market to settle instead of diving in during turbulent times.

lordnacho 7y ago

This move often fails because you can never hike the rate enough, since you don't want to hurt borrowers. In other words, you have competing motives that don't reconcile. It's also often seen as a desperate tactic, the kind of thing that is done right before capitulation. Which of course makes it even less likely to work.