Scotland says No – Pound rebound ‘means rate rise on track’

The rebound in sterling following the No vote in Scotland’s independence referendum means the Bank of England is likely to press ahead with rate rises early next year say analysts.

The pound rose from $1.62 earlier this week to $1.65 this morning following the confirmation of the victory for the No campaign in the referendum. Market jitters over the referendum had seen sterling fall from $1.71 in July to this week’s 11-month low of $1.62.

Schroders European economist Azad Zangana says: “The news will come as a relief for investors and financial markets, reflected by an early morning bounce in GBP versus EUR and USD. Indeed, sterling has risen from 1.62 against the US dollar at the start of the week to a peak of 1.65 this morning. The prospects of months of messy negotiations, uncertainty over the division of national assets and debt, and the currency arrangements of an independent Scotland had been weighing on the confidence of investors over the past few weeks, especially as polls had tightened.

“Overall, major disruption has been avoided and focus can now return to building on the strong economic recovery in progress. The Bank of England is now likely to press ahead with raising interest rates early next year in the absence of political uncertainty.

“Westminster is now expected to devolve more power to Scotland after a late promise by the leaders of the major Westminster parties. Variability in tax rates may introduce distortions at a micro level, but should have little impact to the overall macro-economy. The result along with further devolution should mean that another referendum is very unlikely in the foreseeable future. However, long-term investors will be minded of the risk of separation and may demand a premium for undertaking fixed asset investments in Scotland going forward.

“Continuation of the union also means the risk of UK exit from the European Union has been reduced, although does remains significant. Scottish residents are more in favour of remaining in the EU, compared to the rest of the UK where the majority favour an exit.

Sanlam head of investment solutions Rick Eling says: “Market jitters appeared in the final weeks of the referendum campaign as Yes Scotland appeared to pick up momentum.  An equity rally that began on August 8th fizzled as soon as the first opinion poll showed “too close to call”.  Gilts also fell nearly 2% from September 1st. Both can be attributed to a genuine fear that the UK was about to break up. Nobody took this prospect seriously until late in the day. And with so many questions left unanswered over currency, oil and debt division, it wasn’t surprising that traders were spooked.   There was the potential for serious market volatility had the vote gone the other way.”