Britain Fund

Brexit on British Stock Market

Britain-FundThe economy of Britain faced uncertainty when they made the decision to leave European Union. However, it seems that FTSE 100, which is the main stock index of United Kingdom, is going nicely after Brexit. The initial shock of Brexit created some sort of an impact on the British Stock Market. It caused a significant drop of about 3.15%. This drop rose further by additional 1.6% when the Bank of England made a decision to cut down the interest rate to 0.25%. it was done with the objective of counterbalancing the negative effects left by Brexit on the economy of United Kingdom.

As a result of the announcement, a rise in the stock market was expected. Various studies have been conducted about this subject as well. According to the results of these studies, it has been identified the independent path followed by stock prices and interest rates. Usually, lower interest rates would result in an increase in the share prices as they can make the bonds less attractive. This can reduce the cost associated with borrowing for the new investments.

Along with Brexit, the value of GBP dropped and it buoyed FTSE. As a result, expenses of UK multinational companies were reduced. On the other hand, Bank of England pledged in order to implement quantitative easing, which is associated with purchasing corporate bonds in order to reduce the cost associated with capital of UK corporations and increasing profits. However, it reflects only to a short term reaction, which is depicted by the stock market. The long term situations would entirely depend on the decisions taken in order to improve the economic outlook of the country by cutting down of the interest rates. It doesn’t look promising at all.

At the moment, the interest rates of the country have hit record lows. They have been low since 2009 March. This reflects to the fact that there is very little room for monetary policies in order to influence the economic activities. This situation is considered as zero lower bound. If the interest rate cut continues, improvements of the economic outlook would be hindered.

If the economic medicine fails to deliver improvements, we would come to a situation where helicopter money needs to be used. Instead of reducing the interest rates, the government has the ability to bypass banks and provide cash into the UK economy directly. Such a situation would improve aggregate demand as well as consumption.

The biggest issue that creates a negative impact on the stock market is the reluctance followed by government when triggering Article 50, which initiates the Brexit proceedings in an official manner. As per the current indications, the government would wait until 2019 in order to implement it. This is not a small time period and has the ability to harm the economic performance of the country. Therefore, it is the high time for the government to think about it.