What do low interest rates in the UK mean for the Pound (GBP) exchange rate?

When the global economic crisis struck in 2008, governments and financial institutions from across the world had to introduce measures to prevent complete financial collapse. Many developed nations opted to deploy the strategy of cutting interest rates to historic lows in order to reduce borrowing costs and ease conditions for consumers. In the UK the Bank of England cut interest rates to a record low of 0.5% in March 2009 and has held rates at that level ever since.

However, with the UK economic recovery stepping up a gear during 2013, there had been hopes that the BoE might raise interest rates sooner than previously projected. When Mark Carney (former Governor of the Bank of Canada) took over from Mervyn King as chief of the BoE, investors had expected a bit of a shake up, and Carney has certainly made life more interesting. Over the last twelve months Carney has come to be known as an ‘unreliable boyfriend’ on the basis of his contradictory attitude to interest rate hikes.

After initially linking interest rate hikes to the UK’s unemployment rate, the Bank of England had to change tact after the level of joblessness fell far quicker than anyone had anticipated. Additionally, concerns that the UK housing market was overheating prompted Carney to hint that rates might be increased sooner rather than later, causing a reactionary upswing in the Pound. However, he later backtracked on previous statements and has since yo-yoed in reaction to UK inflation, wage growth and output concerns.

All this has inspired notable volatility in the Pound, with the GBP/EUR exchange rate moving from lows of €1.19 to just brush highs of €1.29 in the year-to-date. While some of the Pound to Euro shifts have occurred in response to developments in the Eurozone, the timing of the first increase in UK interest rates has been firmly in the spotlight and it’s now expected that borrowing costs will be increased early next year. If the UK becomes the first of the Group of Seven nations to hike interest rates the Pound could surge against its rivals and may even approach its strongest levels since the onset of the global economic crisis.

So if you have foreign currency to trade for Pound Sterling you may want to start looking into your international money transfer options soon. Leading currency brokers will be able to provide you with expert guidance regarding exchange rate movements and currency trends and can help you decide whether to lock in an exchange rate to pre-empt a spike in the Pound.