Pound takes a dive as rate chop looms
The pound has hit new lows amid speculation that interest rates could be cut to 0% next year.
The minutes from the Bank of England’s Monetary Policy Committee’s (MPC) December interest rate cut show that the decision to shave 100 basis points off the base rate was unanimous, and that the nine members of the Committee discussed an even bigger cut.
The minutes state that a larger cut was eventually ruled out by the group of economists amid concerns it would “undermine confidence” in the economy and could cause an “excessive” fall in exchange rates.
Economists now expect another interest rate cut in January. And, in light of the Federal Reserve slashing US interest rates to between 0% and 0.25%, some believe rates in the UK could also hit zero in the months ahead.
The news sparked the pound to fall below €1.10 and $1.5.
Jonathan Loynes, chief European economist at Capital Economics, says: "December’s minutes and the latest labour market data support the view that the MPC could soon be following the US Fed in cutting interest rates very close to zero. [...] Another cut in rates in January looks very likely and is unlikely to be the last."
Mark O’Sullivan, director of dealing at Currencies Direct, adds: “Following the US Fed’s decision to slash interest rates Currencies Direct is seeing a huge dollar sell off which is likely to continue throughout the day.
“The Fed’s move has also put pressure on the Bank of England to follow suit and cut interest rates again in the UK, possibly a full point cut to 1%.
“We are already this morning seeing the pound trade at an all-time low against the euro and this is likely to get worse as more investors lose confidence in the pound amid fears about the UK economy.”
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.