The Bank of England made an historic move last Thursday: it cut down it’s main interest rates by half a percent down to 0.5%. This is the lowest rate the bank has known in it’s 315 history.
The Bank of England also declared that it will pump 75 billion pounds into the market to ease the credit crunch that Britain is feeling. Britain is one of the mainly hit economies of this crisis as the real estate bubble there was drastically inflated. The British Pound lost around 25% of its value in the past months.
My estimation is that it will continue to do so due to 2 reasons:
1. The lower interest rate means that deposits in Pounds receive a lower interest, making them less attractive to foreign investors and institutions. You can get a higher return when holding deposits in other currencies.
2. This recent 75 billion pound (106 billion dollars) pump up is unlikely to be the last. The more pounds are floating around out there, the lower its value is supposed to be. It’s as simple as that.
The continued weakness of the Pound may not be felt overnight, but I believe that in the coming months we will not see a recovery in its value against the other major currencies. As I said, Britain is experiencing major problems and they’re not likely to go away soon.
For those of you with British Pounds, the only hope may be that the rest of the world is also experiencing major problems which aren’t likely to be solved soon. The European Central bank also reduced its interest rate for the Euro bloc and so the pressure on the Pound may be lesser… for the time being at least.
The Pound has already lost a great deal of its value and it may be difficult to see it lose more, but in this economic climate, anything is possible. I just don’t see a recovery coming soon.
