Interest Rate Question

Hi guys, I have some question about interest rate statement news.

When it says 'Interest Rate Statement', does it mean interest rate for borrowing money or investing money? I don't quite understand the concept, when interest rate get cut, does that mean it will encourage people to invest more or not?

Thanks a lot

Its the rate of interest the BOE lends to other banks,who then lend money to us.
A decrease should in theory stimulate the economy as people dont have as much mortgate to pay so they have more money to spend in the shops basically.
Also businesses pay less on loans so they can invest in new machinery etc in theory
A cut in interest should increase the stock market (though probably only short term) and lower the pound but the pound dropped yesterday in anticipation so may already be at support

If you click on the note in the interest statement line in the calender it gives a link to the BOE website where there is a proper explanation

On another note I like your signature.Unfortunatly it could apply to me

cool!

Thanks Steve!

This diagram was on the BOE site

So if rates get cut , the pound goes lower.

But, if the interest rate is lower, people will lend easier and people will ask a lot of pounds because they can borrow cheap. How come then the pound does not go up due to the extra demand?


greets,

http://C:\Users\stephen\Pictures\£.gif

Hi grasshoppa

When I posted my reply I had just posted a similar chart to this chart of GBP/USD on another thread and I was thinking of this chart when replying to this thread.

In post no2 on here I was referring to the price dropping to the yellow box area of support

The price had though already dropped a lot the day before and was already near support.

If the price on Wednesday had not dropped so sharply and was in the blue box area then with the drop in interest rates we could have seen a sharp fall on Thursday to the yellow box but most of the fall had already happened.

Getting back to your question.

The general consensus on interest rates is that if rates are cut,that gives a boost to the economy because people have more money to spend.

It is also supposed to have a negative effect on the currency because overseas investors see less return on GBP.I think this is why we get quick downward movements in the currency when interest rates are lowered.

There is also the longer term view that if the economy is boosted by lower interest rates then there is more money spent,creating economic expansion, and this can create foreign investment as people invest in strong economies and profitable businesses.

I suppose the exchange rate also depends on how good the other currency's economy is.
Take GBP/USD . The USD is considered weak at the moment so reducing GBP interest rates may not have too much of a downward pressure on GBP,especially if USD reduce their interest rates next week.

It will be interesting to see if GBP holds at the support level on the 18 month channel and continues it's uptrend, or , do we get a break and a possible trend reversal/consolidation.

Also note that 0.25% rate cut is only a small cut and may have little more than a short term effect of boosting an economy that many think is in for a serious correction in the New Year.

Well I have given you my thoughts.No doubt somebody will post a different view.

Steve