COLUMNISTS Interest rate differentials are supposed to be one of the main factors that drive foreign exchange rates. Higher rates will attract funds and so, when one central bank cuts while another stays steady, that should tend to weaken the currency of the bank that cuts.
Thursday’s half percentage point cut by the Bank of England brought UK rates a full point below those in the eurozone as the European Central Bank opted to stay on hold. This was after almost a decade when sterling rates were higher than euro rates – a major factor in the long-standing overvaluation of sterling that recently came to a sudden end.
