Today sees the biggest economic release of the week in the form of the Bank of England Interest Rate decision. This will dictate sterling movements today and is well worth being aware of if considering any currency transfers involving the pound.
In the first full working week of every month the Bank of England’s Monetary Policy Committee meets to discuss whether or not they will make any changes to the UK’s base interest rate and any changes in their ‘asset purchase facility’, also known as QE.
Interest Rates – It is always worth being aware of the interest rate of the central bank for the currency you are concerned with. Generally speaking the lower a rate the weaker the currency. And vice versa the higher the rate, the stronger the currency. In much the same way as a higher interest rate attracts savers to a bank account, a higher central bank rate increases the likelihood of investment in that country and hence currency. The mere sentiment an interest rate will be raised or lowered can cause exchange rates to move as investors move money to take advantage of any perceived future gains.
The UK has had interest rates at 0.5% ( an all time low) for 3 years because of the financial crisis. A lower interest rate helps boost an economy by making borrowing cheaper and increases the chance of growth in the economy. It is highly unlikely we shall see any interest rate movement today, but the fact the UK is probably going to be the first of the US, UK and Europe to be raising interest rates (even though not for at least a year) is causing the pound to strengthen at the moment. The lowering or raising of Interest Rates is not the only way a central bank can influence the economy however…
Quantitative Easing – QE or the ‘asset purchase facility’ as it is known is the process whereby the Bank of England purchases assets of banks to create extra money which allows the banks to lend more to private individuals and businesses, thereby stimulating the economy. Seen as a dirty word by some, QE increases the money supply and generally causes the currency to weaken. Some would question its effects on the economy but it is impossible to say what state the UK would be in now, had it not been for the previous rounds of QE. Employed by the US and Japan it was previously seen as a method of last resort, now more of a crutch for economies struggling to grow.
Considering the UK is now technically back in recession and Eurozone issues look set to get even more complicated we may see the BoE adopt a pre-emptive strike as they did last year. I personally do not think they will but for anyone looking to purchase the pound, this morning’s news is well worth waiting for. But if you do not see the rate go the way you had wished I would be set for further losses because if there is no change in rates or QE then we may see a ‘relief rally’ as the market picks up slightly countering any drop prior to the release in expectation of more QE.
If you are considering any currency transfers and would like assistance with securing with the very best exchange rates and free no obligation information about all of the events moving your exchange rate including forecasts, please contact me Jonathan directly on 01494 787 478, quoting PSF or email me directly [email protected]
Any comments, questions, suggestions or enquiries welcome.