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.

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