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How the Bank of England sets interest rates and the effect on exchange rates and the Pound
22 October 2014

The Bank of England Act 1998 gives the Bank of England (BoE) the task of setting the monetary policy to meet the Government’s inflation target. All of the decisions during the day are taken by the Bank’s Monetary Policy Committee (MPC). The Committee meets on a monthly basis and minutes of its meetings are released on Wednesday of the second week after the meeting takes place. During these ‘minutes’ they discuss ongoing issues and how they can resolve them. Mark Carney is the current governor of the BoE and in charge of the MPC; he took over as governor during a UK recession after heading up the Bank of Canada for 5 years. Carney was the first non-briton to hold the position since 1694! The MPC is made up of nine members of the BoE the reason that there are 9 members is so that they always have a definitive vote.

The Governor asked members the Committee to vote on the proposition that bank rates should be kept at 0.5%.

In terms of the above mentioned bank rate, seven members of the Committee voted in favour of the proposition with the other two members choosing to vote against the proposition, preferring to increase Bank Rate by 25 basis points (increase to 0.75%). If the other members voted for a ‘hike’ this would have resulted in the people who are in debt taking a hit and everyone who is debt free with money in the banks reaping the benefits of this decision.

As always the release of the BoE minutes will have an effect on the current exchange rates. The markets are adjusting their prices according to the interest rate changes which now don’t look set for a hike any time soon, with no rise in the rates imminent now is a very good time to secure a favourable rate as the pound looks set to weaken before its projected strength.

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