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Sterling hits 31 year low

British 10-year government borrowing costs sank below 1 percent on Monday for the first time ever and sterling tumbled to a fresh 31-year low against the dollar as investors bet Britain’s vote to leave the EU will trigger a Bank of England rate cut.

Billions of pounds were wiped off the value of British financial stocks, and analysts at several banks slashed their forecasts for the pound in the wake of Britain’s vote on Thursday to leave the European Union.

Finance minister George Osborne said on Monday the economy would have to face up to “an adjustment” as it dealt with the fallout of ‘Brexit’. Against a backdrop of sliding share prices and an uncertain economic outlook, investors sold sterling and sought the safety of government bonds.

The pound’s fall on Friday was the largest in modern history, reaching more than 10 percent against the dollar at one stage, and was also the largest decline since at least the 1970s on a trade-weighted basis.

RBC Capital Markets now expect the BoE to cut rates by 25 basis points next month to 0.25 percent, and again in August down to 0.1 percent along with an additional 50 billion pounds of quantitative easing bond-buying stimulus. Several banks, including Goldman Sachs and Bank of America Merrill Lynch, cut their sterling forecasts too.

A push below $1.30 GBP/USD cannot be ruled out.

Many economists have cut growth forecast for the UK. Goldman saw Britain entering a mild recession within a year due to a deterioration in its terms of trade, scaled-back investment and tighter financial conditions because of exchange rate fluctuations, and weakness in risk assets.

 

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