Most people only think about exchange rates when they’re about to travel overseas. However, changes in a currency’s value can have far-reaching implications beyond travel costs.
This blog considers the factors dictating a currency’s value and who benefits from a solid or weak pound. The first thing to understand about exchange rates is that they are relative – they reflect the price of one country’s currency in terms of another country’s currency.
The pound had hit a record low against the dollar (£1.03 to $1.00) on Monday, 26th September 2022 with a resurgence since. As of 4th October, the pound was sitting at 1.15 to the dollar.
What has happened to the pound / why has it fallen
Over time the British pound has weakened against the dollar as well as against other global currencies. The US central bank and Federal Reserve have been attracting international investors, with interest rates steadily rising in the US.
Another reason the pound has weakened is the market’s uncertainty about funding costs for the spending changes announced in the mini-budget. Under the newly appointed prime minister, Liz Truss, the new administration announced an expansive economic policy based on wide-ranging tax cuts and other support measures worth an estimated £45 billion in their mini-Budget.
The government believes that the solution to increase demand and boost economic growth is to put more money in the citizens’ pockets and reduce the amount of taxes that companies must pay.
As a result, the government has set a target for GDP to reach 2.5% per annum over the medium term, arguing that the growth of the UK economy will reduce the UK’s debt-to-GDP ratio in a fiscally sustainable manner. However, the markets do not agree with these measures. They remain concerned that this situation will lead to higher inflation, which will mean higher interest rates that will reduce economic growth.
As is well known, the Bank of England has had to raise interest rates aggressively in an attempt to fight inflation. The bank rate increased from 0.1% in December to 2.25% now.
The collection of all of this has resulted in added uncertainty, in an already uncertain environment, and low confidence in the short-medium term performance of the UK government. This ultimately meant a sell-off of the pound.
What it means for mortgages
Should the pound not rally, the Bank of England will increase the interest rate, meaning debt will become more expensive, hitting many markets, including mortgages.
Up until late 2021, interest rates were at a record 0.1%. However, inflation and interest rates continue to rise, resulting in higher borrowing costs for new homebuyers looking to acquire a mortgage and those looking to refinance.
Average mortgage rates have increased across the board in line with banks rising cost of money since December last year. According to economists, interest rates are due to peak at 5.5% in the summer of 2023, meaning monthly payments could be double what they are now.
Banks will start requiring proof from existing borrowers that they can afford these rising interest rates in the short term. There is some insulation for higher speeds, however perhaps less so at a time of rising living costs. Although, there are steps homeowners can take in order to protect themselves. Get in touch with one of our brokers to discuss your options.
What it means for overseas investors
A pound’s value decline might seem worrying, although it isn’t all bad news. A weak pound is damaging for UK importers and manufacturers with supply chains overseas. This is because the purchasing power of their pound is reduced.
On the flip side, the cheaper pound makes it less expensive for overseas investors to buy goods and services from British firms, making them more competitive and can help to increase sales. It could be of some benefit to companies struggling with additional bureaucracy and customs checks introduced after Brexit. According to recent European, exports to the trade bloc declined by nearly 14% in 2021 compared with the year before.
This international diversification can help smooth returns; a low exchange rate can encourage tourism and makes the UK an attractive location for global investors.
UK firms have already seen significant takeover bids from overseas investors, such as fashion chain Ted Baker, which exited the London stock market after 25 years upon a £211 million takeover by the US fashion house behind Reebok and Juicy Couture. The firms’ profit obviously won’t be worth as much in dollars, so asset-backed situations and brands are most valuable. We have also seen a high influx of enquiries and applications from overseas investors.
What it means for the housing market as a whole
According to the Independent, the demand for London property from overseas buyers is at “new levels” as they rush to take advantage of the weaker pound.
With travel restrictions easing after two hard years of the Pandemic, London has again attracted foreign buyers back to its property market. The weaker pound is another reason why the demand from foreign investors is increasing significantly.
Given the beneficial exchange rate of the dollar against the pound, studies show that real estate agencies have seen a particular increase in inquiries from buyers from US citizens or residents of countries where the dollar is the main currency.
Historically housing market fluctuations have been closely linked with the macro environment. However, in more recent times it has proven resilient to external threats. The increase in interest rates will have an effect on demand but the increase in demand from overseas investors may level this out.
Ultimately, the UK housing market has proven itself as a solid long-term investment for residents and worldwide investors – economists do not expect this to stop.
What to do next
As we can understand, like any market movement, currency movements are difficult to predict and are ultimately priced by consumer/investor confidence. Whether you are moving home, looking to invest in the UK for the first time or building your portfolio – Articus Finance and our brokers are here to assist and advise on the best course of action when it comes to debt.
At Articus Finance, we work to make our clients feel confident in their future mortgage investments, regardless of what is happening in the general economy. Get in touch today.
