On Thursday this week, the Bank of England’s Monetary Policy committee will decide whether to raise interest rates from their current 0.5%. In my post yesterday I said that it’s unlikely that they would change this, however I now think that there is a much higher chance of a hike than I originally thought. Certainly when you look at what most analysts think, it seems that there are many in the markets that think they will raise interest rates to 0.75%. If they do, how would it affect the Pound?
Interest Rates and effect on Sterling exchange rates
When a country raises interest rates, or is expected to do so, it usually strengthens the currency concerned. This is because the higher return on offer for investors increases demand. If you had asked me 3 weeks ago, I would have said that it’s almost certain that interest rates would go up in August. However, lower inflation figures earlier this month coupled with poor retail sales figures changed my view. With a slight slowdown, my view was that the MPC would hold fire to wait for another round of data.
Will the Pound rise or fall if they raise interest rates?
I think a rate hike this week is now 50/50. There are 9 members of the MPC that vote, including governor Mark Carney. A majority of 5 is needed for any action. I think that 4 will vote for a rate hike, with Carney placing the deciding vote. If they do raise rates, I think it should lend some limited support to the Pound. It’s important to remember however, that a hike is already be partially priced in. Mark Carney also gives a speech half an hour after the announcement. He can be rather pessimistic about the UK economy, so his comments could easily pull the Pound lower.
Overall, I think that the interest rate decision on Thursday carries more downside risks for the Pound. I think a rate hike should be delayed until the next meeting. If the MPC decide to leave rates on hold, then it’s likely Sterling will fall sharply. If they do hike rates, then it may provide some small gains for the Pound, but these are likely to be limited for the reasons I’ve outlined above.
Do you need to convert Pounds to another currency?
A hike could strengthen the Pound, however Carney’s speech shortly after could bring it back down again. So there could be a small window of opportunity to get a better exchange rate. To be in a position to take advantage of the exception rates of exchange we offer, get in touch today to discuss how to open a free account.