Interest rate cut good news for holidaymakers
Today’s interest rate cut has been welcomed as good news for holidaymakers following the pound rallying against the euro and the US dollar.
Since the Bank of England first started slashing interest rates in October, the pound has grown significantly weaker against these other currencies and at one point looked likely to reach parity with the euro for the first time.
However the strength of the pound against the euro improved slightly over the Christmas period, and January’s 0.5% interest rate cut is expected to spur this on further.
Stephen Heath, chief executive of FairFX.com, says: "The pound has rallied amid news of the base rate cut, gaining 1% against both the euro and the dollar. [...] it is expected to claw back further gains in the coming months as Europe and America start to look as vulnerable as rival economies."
The currency markets largely expected interest rates to be cut by 1%, so the 0.5% reduction may have bolstered confidence.
Marc Cogliatti, currency strategist at foreign exchange specialists HiFX, explains: "The reaction has been broadly positive as the market is relieved that a more aggressive cut was not deemed to be required just yet."
Rupert Lee-Browne, chief executive officer of currency broker Caxton FX, says the dramatic fall in the value of the pound before Christmas was largely driven by a lack of confidence among currency traders and short-selling: “Everyone wanted to get rid of sterling before Christmas, and for short-sellers it was an easy bet that the pound would fall in value,” he explains.
The fact that the European Central Bank is also expected to cut interest rates next week will also help bolster the pound’s value.
John Higgins, senior economist at Capital Economics, believes that, for currency traders, the run on sterling is over.
Ahead of the interest rate decision, he said that an would only produce a "muted" detrimental impact on sterling: "After all, it should only be a matter of time before other central banks such as the European Central Bank also trim borrowing costs towards zero and keep them there.”
But Cagloatti is concerned that the pound's rally may not be long-lasting: "The question remains - how long will this last? With sterling still looking relatively cheap, we could well see the current recovery continue a little further before it starts to run out of steam although we must still remain respectful of the longer term downward trend."
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.