BREXIT—THE UNITED KINGDOM TREASURY WAS WRONG ABOUT WHAT WOULD HAPPEN TO INTEREST RATES. In spite of the pessimistic outlook about the effects of Brexit by Tyler Durden which I posted on here on June 24, the equity markets, after a temporary dip, have bounced back after a week to roughly where they were before Brexit.
Here is another example—presented by Brexit—of how little is known about the economy. This article by John Carney in the Wall Street Journal (July 1) tells about how the United Kingdom Treasury was wrong about what would happen if voters approved Brexit. In late May, about one month before the vote, the UK Treasury issued a report which said that the government cost of borrowing would rise if Britain voted to leave the European Union. At that time, the interest rate for 10 year UK government bonds was around 1.50%. John Carney points out that: “One week after the vote, the yield on 10-year British government bonds…fell to 0.87%, their lowest levels in modern history.” That is, the UK Treasury predicted that after Brexit a key interest rate would be almost twice as much as the rate turned out to be.
Of course, these are all short run results.