7  9  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  9  Chart 5: Households and businesses have consistently expected increases in interest rates to be gradual and limited Per cent 6  2014 Q1 Pre-crisis average level of Bank Rate (5.2%)  2015 Q1  5  2016 Q1 2017 Q1  4  2018 Q1 3  2019 Q1  2 1 0 0  1  2  3 Years ahead  4  5  6  The experience in the euro area and UK demonstrates how guidance can be effective in managing expectations as circumstances change. As intended, “limited and gradual” guidance has dampened interest rate volatility (Chart 6) and reduced the correlation between interest rate volatility and economic uncertainty (Chart 7). Both developments have increased the degree of monetary policy stimulus, thereby reinforcing the recovery during turbulent times. Chart 6: Interest rate volatility has remained low since guidance was provided Standard deviation of option-implied distributions for 3m Libor in 12 months' time, UK and US August 2013 guidance issued 3m US LIBOR (12m ahead)  Basis points 200 180 160  standard deviation February 2014 guidance issued  140 120  EU referendum  100 80 60 40  3m UK LIBOR (12m ahead) standard deviation  20 0  2000  2002  2004  2006  2008  2010  2012  2014  2016  2018  Sources: Bloomberg Finance L.P., Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE) and Bank calculations.
In the months leading up to June 23 there was a tight correlation between the value of the currency and the perceived likelihood of a “remain” vote (Chart 1). That’s why the MPC, in conditioning its May 2016 forecasts on that outcome, assumed a  Chart 1: Sterling sensitive to expected result well before the referendum itself  higher path for the exchange rate. It’s also why the Committee suggested there might be a “sharp correction” in sterling’s value in the event of a leave vote. And in the event that’s what we got. On June 23 and 24 sterling fell further against the dollar than over any two-day period since the devaluation of 1967. You didn’t need any economics to make this prediction – the relationship in in Chart 1 was enough. But you probably do need some economics if you want to understand why the currency reacted this way. While we don’t know  Source: Bloomberg, Thomson Reuters Datastream, Betfair  precisely what’s in the collective mind of the foreign exchange market, in my view there are two broad possibilities: Brexit is expected either to weaken domestic demand or raise the cost of exporting. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  To understand these effects remember first what the real exchange rate is: the relative price of consumption 1  here compared with that in our trading partners .