What currency is affected by the interest rate decisions of the Bank of England (BoE)?

By Selwyn Gishen AAA
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's the highest year-over-year inflation rate in the history of the U.S.?

    Learn about periods with the highest inflation in U.S. history and the mandated role of the U.S. Federal Reserve in controlling ...
  2. What's the lowest year-over-year inflation rate in the history of the U.S.?

    Learn about years with the lowest year-over-inflation in U.S. history. Read about how inflation is calculated using the consumer ...
  3. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ...
  4. What is the difference between inflation and deflation?

    Determine how inflation and deflation affect prices and employment. Economies frequently teeter between these two economic ...
RELATED TERMS
  1. Penalty Repricing

    An increase in a credit card’s interest rate that occurs when ...
  2. Universal Default

    A practice whereby a credit card issuer increases a credit card ...
  3. Wall Street Journal Prime Rate

    An interest rate that large banks in the United States charge ...
  4. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
  5. Current Liquidity

    The total amount of cash and unaffiliated holdings compared to ...
  6. Developed To Net Premiums Earned

    The ratio of developed premiums to net premiums earned over a ...

You May Also Like

Related Articles
  1. There are many ways to rank the word's most powerful companies. Looking at market value, brand value or sales revenue are all methods used to rank the biggest companies in the world.
    Economics

    Most Powerful And Influential Public ...

  2. A look at China's plan to control population growth and how it could change going forward.
    Economics

    China's One-Child Policy Explained

  3. With the second-largest economy in the world, China has significant (and growing) influence on the global economy. But how is that impact figured?
    Economics

    A Look At China's Growing Influence ...

  4. Investing

    The Increasing Importance Of The Reserve ...

  5. If you're considering investing in China and want to know when to buy, sell, hold or stay away, consider these economic indicators.
    Economics

    Eyeing China? Consider These Economic ...

Trading Center