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| Version 1 | Version 2 |
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| How will a strong pound affect my holiday? | How will a strong pound affect my holiday? |
| (34 minutes later) | |
| The heavy hint from the Bank of England governor, Mark Carney, that UK interest rates could rise as soon as December sent sterling 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 confidence | Related: Housing market could face collapse if base rate rise hits buyer confidence |
| Why has sterling appreciated? | 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. | 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 euro. | |
| Does this mean cheap holidays to Spain this summer? | Does this mean cheap holidays to Spain this summer? |
| 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 £347. | |
| Shopping trips to New York don’t look quite such a bargain, however: the determination of the 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. | |
| Could the pound strengthen further? | Could the pound strengthen further? |
| 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 with €1.44 now. | |
| 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. | 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. |
| However, some economists argue that once the promised referendum on “Brexit” - a UK 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 runup to the Scottish referendum last autumn. | |
| What does a strong pound mean for the economy? | What does a strong pound mean for the economy? |
| 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. | 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. |
| An appreciating currency also tends to reduce inflation, by making it cheaper to buy imported goods, dragging down prices. | An appreciating currency also tends to reduce inflation, by making it cheaper to buy imported goods, dragging down prices. |
| 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. | 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. |
| Carney’s predecessor Lord Mervyn King once called this the “Maradona effect”, after the famous move from the Argentine striker during 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. | |
| How high could interest rates rise? | How high could interest rates rise? |
| Even without the Maradona effect, Carney doesn’t expect to have to increase rates many times before the nascent threat of inflation is vanquished. | Even without the Maradona effect, Carney doesn’t expect to have to increase rates many times before the nascent threat of inflation is vanquished. |
| 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%. | 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%. |
| Is it possible borrowing costs could stay at their record low? | Is it possible borrowing costs could stay at their record low? |
| 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. | 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 chief economist, Andy Haldane, has expressed scepticism in the past about whether an imminent rate rise is necessary. |