The UK’s Central Bank Surprises Investors

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What's going on?

The Bank of England, Britain’s central bank, surprised investors by not decreasing its target interest rate on Thursday. It did say that it expects to take action in August – and investors are already thinking that could mean something big.

What does this mean?

Usually, the lower the central bank’s interest rate, the more it stimulates economic growth (because it makes it cheaper for people and companies to borrow money to do things like buy houses and hire workers). However, interest rates have been at very low levels for the past eight years – cutting them a little bit more might not be enough of a stimulus. Some think that the Bank of England is preparing to take more extreme measures, like directly buying UK government bonds – which is kind of like lower interest rates on steroids (you can read a more technical explanation here).

Why should I care?

For markets: The value of the pound jumped significantly on the news.

That’s because, generally speaking, the lower interest rates go, the more downward pressure is put on the value of the relevant currency (click here for a longer explanation). The pound increased in value because most investors were expecting an interest rate rise which didn’t materialize – so the pound increased in value. However, if the Bank of England is indeed preparing even more aggressive action in August, it could be a significant negative for the pound.

For you personally: The Bank of England said there were numerous signs that the UK economy was slowing in the wake of the Brexit vote.

It noted that there were signs that it has hurt both people’s and companies’ confidence in the economy (and that can easily feed through into real economic activity, like delaying big purchases and hiring decisions). In short, economic activity is likely to weaken in the UK, at least in the short-term – and that means it will be tougher to find/move jobs and you’re less likely to get a pay raise.

Originally posted as part of the Finimize daily email.

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