3. In the simplest of terms, UK interest rates are a) very low and b) could still go lower* and money supply could well go higher. Interest rates are the reward for holding a currency, and so if the reward is low there is less incentive to do it. Hence demand for sterling is lower. At the same time, the government is taking steps to increase the supply of Sterling (cash injections into banks, guaranteeing loans etc). If demand for a commodity falls and supply increases, the price of that commodity will fall. In this case, the commodity is Sterling itself.
It's worth pointing out that a 'weak' pound at the moment is definitely a good thing. It has the advantage of helping exporters by making their goods and services cheaper overseas. It has the disadvantage of making imports more expensive and so can be inflationary - but there are very few inflationary pressures in the economy at the moment. We should all be grateful that this government never joined the euro - if it had, we would have been saddled with a higher interest rate and a currency that was too expensive.
* Lower than the euro-zone base rate, but not as low as the dollar or the yen. However, the dollar and the yen rates won't go lower and sterling rates could.
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Date: 2009-02-01 03:42 pm (UTC)It's worth pointing out that a 'weak' pound at the moment is definitely a good thing. It has the advantage of helping exporters by making their goods and services cheaper overseas. It has the disadvantage of making imports more expensive and so can be inflationary - but there are very few inflationary pressures in the economy at the moment. We should all be grateful that this government never joined the euro - if it had, we would have been saddled with a higher interest rate and a currency that was too expensive.
* Lower than the euro-zone base rate, but not as low as the dollar or the yen. However, the dollar and the yen rates won't go lower and sterling rates could.