Role and importance of official interest rate of British pound

British pound

The official interest rate  of the pound, also known as the Bank of England’s official interest rate, is a key monetary policy tool used to influence borrowing costs and economic activity in the UK. Here are some important points about the official bank rate to the pound sterling.:

Definition: The official bank rate for the pound sterling refers to the interest rate at which the Bank of England lends to commercial banks and other financial institutions. It serves as a benchmark for other interest rates in the economy, affecting the borrowing costs of businesses, households and financial markets..

Monetary Policy Tool: The Bank of England’s Monetary Policy Committee sets the official bank rate as part of its efforts to achieve the government’s inflation target. By adjusting the interest rate, the MPC aims to control inflation, support economic growth and maintain the stability of the financial system..

Objectives: The primary objective of the MPC is to maintain price stability, which is currently defined as an inflation rate of 2% as measured by the Consumer Price Index (CPI). The official bank rate is one of the tools used to manage inflationary pressures and ensure long-term price stability..

Effects on borrowing costs: Changes in the official bank rate have a direct impact on borrowing costs for consumers and businesses. When the rate is lowered, borrowing money becomes cheaper, which can stimulate spending and investment.

Market outlook: The Bank of England’s decisions on the official interest rate are closely monitored by financial markets and economists. Market participants analyze economic data, MPC data, and voting results to anticipate possible changes in the interest rate.

It is important to note that the official interest rate of the pound sterling is subject to periodic review and can change in response to evolving economic conditions, inflationary pressures and other factors affecting the UK economy..

Comparing global interest rates: their effects on monetary policy and financial markets

The Bank of England’s official interest rate can be compared to interest rates in other major economies to understand the relative stance of monetary policy. Here’s an overview of how the Bank of England rate compares to rates in some prominent economies:

United States (Federal Reserve): The benchmark interest rate in the United States is the federal funds rate, which is determined by the Federal Reserve. Historically, the interest rates set by the US Federal Reserve have been higher than the official interest rate of the Bank of England. However, the specific comparison can vary over time, depending on economic conditions and political decisions.

European Central Bank (Eurozone): Eurozone monetary policy is determined by the European Central Bank (ECB). In recent years, the official interest rate set by the Bank of England has generally been higher than the key refinancing rate set by the European Central Bank. However, it is important to note that interest rates can vary between Eurozone member states individually due to specific economic conditions.

Bank of Japan: The Bank of Japan (BoJ) sets interest rates for Japan. Historically, the Bank of Japan has maintained a low interest rate environment compared to the Bank of England. The Bank of Japan has pursued an accommodative monetary policy to address deflationary pressures and stimulate economic growth.

Reserve Bank of Australia: The Reserve Bank of Australia (RBA) sets interest rates in Australia. The RBA’s cash interest rate has been higher and lower than the official interest rate of the Bank of England at various times. Like other central banks, the RBA adjusts interest rates based on local economic conditions and inflation targets.

It is important to note that interest rates in different countries are affected by a range of factors, including inflation, economic growth, unemployment, and central bank policy objectives.

Sterling Falls on Expectations of Rate Cuts

The pound fell after the Bank of England kept interest rates at 5.25%, but signaled a 25 basis point cut was near. The odds of a rate cut increased in August after it emerged that the decision to keep was “well balanced” by three MPC members who voted for it. As a result, the exchange rate of the pound against the euro fell to 1.1826 and against the dollar to 1.2690.

Despite the pound’s rise on Wednesday after UK services inflation hit 5.7%, the minutes of the meeting indicated committee members’ confidence that inflation will continue to fall. “The bullish news in service price inflation compared to the May report did not significantly change the course of the economic contraction,” the minutes said. With the prospect of a rate cut in August, the pound may struggle to make new highs against the euro, while trading against the dollar will remain affected by US economic developments and interest rates..

The pound fell amid these considerations, with the GBP/USD falling from 1.2705 to 1.2680 currently.

Valentin Marinov, head of foreign exchange strategy at Crédit Agricole, says, “We see downside risks for the pound against the dollar and the euro from current levels.” However, some analysts do not believe that the Bank of England is a major impediment to the pound’s performance.

Looking at the currency market as a whole, the dollar continues to hold steady during the week. EUR/USD fell 0.2% to 1.0720 while USD/JPY continues to rise from 158.00 to 158.40 on the day.

In other markets, equities continue to maintain some optimism during the week while waiting for US markets to return later. European indices had some setback yesterday, but are expected to bounce back today.