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As Britons come to terms with higher borrowing costs than they have known for 15 years, one or two will be forgiven for asking why the pound is not rallying more strongly in response to the Bank of England’s recent interest rate rises.
Sterling, as any British tourist who has ventured overseas this summer will confirm, remains deeply depressed compared with levels most people will be used to.
The pound was trading at just $1.175 this morning, down from $1.21 in the days immediately after Vladimir Putin invaded Ukraine, while against the euro it has similarly fallen from just under €1.21 to under €1.18 today.
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That may puzzle some people when the Bank of England was the first of the world’s major central banks to begin raising interest rates in the current rate-tightening cycle in December last year – ahead of peers such as the US Federal Reserve, the European Central Bank, the Bank of Canada, the Reserve Bank of Australia, the Reserve Bank of New Zealand and Sweden’s Riksbank.
Conventional wisdom holds that higher interest rates tend to be supportive for a particular currency.
This may be because the Bank has not raised its policy rate as aggressively as the likes of the Fed and others.
Bank Rate is 1.75% at present, after this half-point rise earlier this month, while the Fed’s main policy rate, Fed Funds, sits at a range between 2.25-2.5%. Similarly, the RBA’s cash rate sits at 1.85% and the RBNZ’s at 3%.
However, the pound has also struggled to perform against currencies whose central banks have not raised interest rates as aggressively as the Bank, most obviously the euro and some of the Scandinavian currencies.
A pound currently buys 12.5 Swedish krona, down from 13.25 at the beginning of March, even though the Riksbank’s key policy rate is just 0.75%. It will only buy 8.77 Danish krona, down from nearly 9.1 at the beginning of March, even though the main policy rate…
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Source : skynews
