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How will a strong pound affect my holiday? How will a strong pound affect my holiday?
(about 9 hours later)
The news on Thursday evening from the Bank of England governor Mark Carney that UK interest rates are likely to rise as soon as December 2015 sent the pound soaring to a seven and a half year high against the euro. But what does this mean for you and your summer holiday spending? The heavy hint from Bank of England governor Mark Carney that UK interest rates could rise as soon as December 2015 sent the pound soaring to a seven-and-a-half year high against the euro. But what does a stronger pound mean for Britain?
Related: Housing market could face collapse if base rate rise hits buyer confidenceRelated: Housing market could face collapse if base rate rise hits buyer confidence
Why has sterling appreciated?
Two reasons: first, Carney’s speech was clearly a deliberate signal that interest rates are going to rise, which, other things being equal, prompts foreign exchange traders to buy, and drive up the pound.
Second, the continuing eurozone crisis is weighing on the value of the single currency, as traders respond to questions about the political and economic sustainability of the rescue package for Greece by dumping the single currency.
Does this mean cheap holidays to Spain this summer?Does this mean cheap holidays to Spain this summer?
Your pound is buying you more euros than it would have done at any time in almost eight years. As recently as summer 2013 it would have cost you around £440 to buy €500 to take on holiday, with commission eating up another chunk of your cash too. Now that €500 costs just £347. So yes, your holiday this year may seem cheaper than it did a couple of years ago. Yes: or France, Italy or any of the other 19 eurozone member-countries. The pound now buys more euros than it would have done at any time in almost eight years. As recently as summer 2013 it would have cost around £440 to buy €500 to take on holiday. Now that €500 costs just £347.
Should I lock in at these rates? Shopping trips to New York don’t look quite such a bargain, however: the determination of Federal Reserve chairwoman Janet Yellen to raise American interest rates mean the dollar has been relatively strong, too: a pound buys about $1.56, down from $1.70 a year ago.
That’s the €64,000 question. “Businesses and holiday makers would be minded to take advantage of the broad sterling strength at the moment,” says Jeremy Cook, chief economist at the international payments company, World First. Could the pound strengthen further?
However, he, like some other analysts, thinks the pound could strengthen even further against the euro in the months ahead, to eventually give an exchange rate of €1.5 to the pound, compared to €1.44 now. It might: Jeremy Cook, chief economist at the international payments company, World First, believes sterling could surge even higher against the euro in the months ahead, perhaps hitting €1.50 to the pound, compared to €1.44 now.
So if you’re not travelling this summer you might want to wait but otherwise now is a good time to buy. Make sure you take a mix of cash and cards both prepaid and a back-up credit or debit card. That would become more likely if the Bank does press ahead with interest rate rises particularly if the eurozone economy is not yet out of the woods.
Can I lock in to these euro rates? However, some economists argue that once the promised referendum on “Brexit” - a British exit from the European Union - is in the City’s sights, and particularly if it looks likely that the public will vote to leave, sterling could come under pressure, as it did in the run-up to the Scottish referendum last autumn.
Pre-paid currency cards are the main way tourists can lock into exchange rates before they travel. These cards are essentially the new travellers cheques, but are far easier to use. They can be safer than carrying cash, and are also widely accepted. What does a strong pound mean for the economy?
With this type of plastic you are issued a card, backed by Visa or MasterCard, along with a pin. Once you have loaded up the card with money, you can use it just as you would a debit card in shops, bars and restaurants. You can also use it to withdraw cash. It’s certainly not good news for George Osborne’s hopes of stoking a new export boom. A strong pound means Britain’s goods are less competitive in global markets, and manufacturers in particular are likely to be hit though the price of imported materials will fall, helping firms to control their costs.
There are now hundreds on the market; moneysavingexpert currently recommends a card from Ukash if you’re loading less than £500, with FairFX and CaxtonFX better for larger sums. An appreciating currency also tends to reduce inflation, by making it cheaper to buy imported goods, dragging down prices.
You need to take into account fees you might be charged to use the card as well as looking at the rate. In fact, if sterling continues to appreciate, it could do some of the Bank of England’s work for it, bearing down on inflation and reducing the need for rate rises.
I want to buy euros now. Where’s the best place to get my currency? Carney’s predecessor, Lord Mervyn King, once called this the “Maradona effect”, after the famous move from the Argentine striker in the 1986 World Cup match against England, when he ran in a straight line, relying on the defenders to dodge out of his way. “Because they expected Maradona to move either left or right, he was able to go straight on,” King said, in a speech in 2005.
One of the best pieces of advice is not to wait until you get to the airport to exchange your cash. The on-the-spot rates can be much higher than if you buy elsewhere or even pre-book to collect at the airport. Similarly, high street banks are almost always more expensive. How high could interest rates rise?
Bear in mind that the retail exchange rate you get when you change your money will be less than the inter-bank exchange rate of 1.44 but you can still get quite close. Even without the Maradona effect, Carney doesn’t expect to have to increase rates many times before the nascent threat of inflation is vanquished.
According to the travel money finder tool on moneysavingexpert.com £500 spent with MoneyCorp will buy you €707 at the moment, which is an exchange rate of 1.41. In his speech on Thursday night, he suggested that households’ heavy debt burden meant the Bank would have to tread carefully as it raises rates from their current record low of 0.5%, with the ceiling being “perhaps about half as high as historical averages” of 4.5%.
I’ve already booked my break, will I get a refund from the operator? Is it possible borrowing costs could stay at their record low?
Package holiday providers will have a clause in the terms and conditions reserving the right to increase charges if new taxes are introduced or currency fluctuations raise the cost of providing your break but it doesn’t work the other way round. If you’ve paid for your holiday they do have to offer refunds if taxes are cut, but not if the cost of provision has dropped. Yes: Carney clearly expects rates to rise; but plenty of things could blow him off course, from a downturn in the global economy, to an unexpected decline in commodity prices, such as the oil price crash which helped to drive inflation to zero in recent months.
The governor will also have to win over his colleagues on the nine-member monetary policy committee, which sets interest rates each month. The Bank’s own chief economist, Andy Haldane, has expressed scepticism in the past about whether an imminent rate rise is necessary.