A:

The Bank of England (BoE) is responsible for the interest rate decisions that affect the economy of Great Britain. As with most central banks, the BoE uses interest rates, among other methods, to increase or decrease the supply of available bank loans needed for commercial or private funding. If the BoE increases interest rates, investors will usually receive higher returns on their deposits in British banks. Increased interest rates in Great Britain often result in the increased value of the British pound, because investors may seek to own pounds in order to obtain a higher rate of return than would be available in other countries. The converse is also true. Lowered interest rates in Britain may send investors to other countries in search of higher returns on their investments, which would then lead to the devaluation of the pound.

It is worth noting that all currencies are connected by globalization and do not function independently of each other. For example, if the Japanese yen is affected by an event in Japan, the effects may filter through to all currencies trading against the yen. If, for example, the yen strengthens against all currencies, the pound would weaken against the yen, even if the economic fundamentals in Britain favor a stronger pound. Valuations are highly dependent on currency flows, such as when the Bank of Japan buys yen across the board. Thus, such an event would temporarily affect the value of the pound, despite any news coming out of England.

For more on this topic, see Get to Know the Major Central Banks.

This question was answered by Selwyn Gishen.

RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  3. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  4. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  5. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  6. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
Related Articles
  1. Economics

    The 2007-08 Financial Crisis In Review

    Subprime lenders began filing for bankruptcy in 2007 -- more than 25 during February and March, alone.
  2. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  3. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  4. Economics

    Negative Interest Rate Policy (NIRP)

    A negative interest rate policy is an unconventional monetary policy tool in which nominal target interest rates are set below zero.
  5. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  6. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  7. Forex

    The Consumer Price Index

    Find out how this economic measure can help you make key financial decisions.
  8. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  9. Economics

    The Basics Of Business Forecasting

    Whether business forecasts pertain to finances, growth, or raw materials, it’s important to remember that a forecast is little more than an informed guess.
  10. Economics

    How Interest Rates Affect The U.S. Markets

    When indicators rise more than 3% a year, the Fed raises the federal funds rate to keep inflation under control.
RELATED TERMS
  1. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  2. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
  3. Laissez Faire

    An economic theory from the 18th century that is strongly opposed ...
  4. Consumer Confidence Index - CCI

    A survey by the Conference Board that measures how optimistic ...
  5. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  6. Stagflation

    A condition of slow economic growth and relatively high unemployment ...
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center