Wednesday 20th February 2013
Good morning. Sterling has dropped again dramatically this morning, after The Bank of England released the minutes to its latest Monetary Policy Committee meeting, showing that some members voted for more Quantitative Easing. In today’s post I will look at the effects of the news, and what this means for those looking for the best exchange rates.
Bank of England minutes
At 09:30am this morning, the minutes were released. It looks like the Bank of England took a dovish tone, as it showed that three members of the Monetary Policy Committee voted for an increase in quantitative easing, including Bank governor Sir Mervyn King.
The members of the rate-setting committee showed the nine-member committee split 6-3 in favour of holding the asset purchasing programme at £375bn, but the fact that 3 voted for more QE, including the governor, weakened Sterling significantly as you can see from this morning’s daily chart below. You can read a full breakdown of the minutes here on the Bank of England site.
So why has this weakened the Pound?
It’s because there is now a very high chance of further Quantitative Easing in the coming months. The split raised the prospect that the central bank might restart the QE programme. The last time there was a similar 6-3 split on the MPC was in June 2012, and the following month a majority of the MPC backed a £50bn increase in asset purchases.
Quantitative Easing effectively floods the market with Sterling, and reduces its value as a result. In the past when QE has been announced, the Pound has dipped sharply and so should we see more stimulus then the Pound may well fall further.
Along with Sir Mervyn, executive director for markets Paul Fisher and external MPC member David Miles voted for an increase in the central bank’s bond purchases of £25bn to take the total to £400bn. The release of the dovish minutes caused the pound to continue its decline, falling 0.9pc to hit the lowest level in more than 15 months against the euro. At the time of writing Pound/Euro rates sit at 1.1425.
So will the Pound fall further?
There is a very good chance of this in my opinion, given that more QE is now likely, our credit rate is under threat, and there is still the ever present risk of the UK slipping back in to recession.
Also of worry to those hoping the Pound will recover is comments made recently by the BoE governor. He said that “there are limits to what can be achieved via general monetary stimulus” as he urged the Government to “find ways of boosting overseas demand for our products” and push through “supply reforms” – often associated with tax cuts and deregulation.
This means that they want the Pound to weaken further to try and boost exports to help the economy recover.
Your options if you need to convert Sterling to another currency
If you are looking for the best exchange rates, it’s likely you have been watching the markets in dismay as the rate has fallen all year. In January GBP/EUR rates were at 1.2350, and rates have fallen over 7% since then to the lows of 1.1420 we see today.
Given the huge volatility we’re seeing at the moment, don’t simply leave things to chance and hope things will move your way. You should take control of what you need to do, know your options and allow yourself to make informed choices on when to fix a rate.
So what to do if you need to convert funds?
The first option is to simply fix the rate now. Even if you don’t need your funds for some time, you can lock in the rate today by lodging 10% of the total you want to convert. This protects you against further falls in the rate, removes your exposure to the market, and will allow you to budget effectively.
Alternatively you could hold off and hope rates recover. This is a risk of course, as there is every chance rates could continue to drop away.
A third option is to hedge your bets. For example if you need to convert £100,000.00 to Euros, you could fix a rate today for £50,000.00. You can then take a gamble on the remaining funds. In this way you have some level of protection regardless what the rate does. If it gets better, then you can convert your remaining funds at a higher rate. If it continues to fall, then at least you converted some of your funds at a better rate.
Take the next step to getting the best exchange rates
If you need to buy or sell foreign currency, send me an enquiry now. I can get in touch to discuss your requirements, run over the options you have, and provide all the information you need to make an informed decision on when to fix an exchange rate. When you do this, the rates we can provide are up to 5% better than the banks.