Home > Forex analytics > Forex exchange rates' theory > UK (British pound) exchange rate

UK (British Pound) Exchange rate: the effect on monetary policy, inflation and consumer prices

The effect of recession and global melt down on the UK exchange rate has been tremendous and quite jeopardising. The floating exchange rate is one of the pivotal features of the monetary policy of UK. It aids in the implementing targeted measures for the consumer prices and also related to the inflation forecasting. With the concept of the floating exchange rate, the central bank is conferred with the benediction of using the monetary policy in accordance with the financial environment so that the inflation rate could be affected. This kind of incorporation in the policy is relieving for the economy of UK, both in terms of the theoretical literature and policy discussions.

Some of the important members of the MPC (Monetary Policy Committee) like Gertler, Bernanke and Vickers have played a pivotal role in framing the short term exchange rates and they believe that the entire impact of the exchange rate resides only with the monetary policy. Later, when the effect of the exchange rate was calculated and its respective effect on the consumer prices and import prices, it was revealed that the connection between the retail price and the exchange rate is comparatively weaker. On the other hand, the relation between the import price and exchange rate is comparatively maintains a closer relation.

On the other hand, there is a weak relation exists between the inflation and the exchange rate due to the incorporation of the pricing to the market models. According to this market, the exchange rate is not taken into consideration when the import price setters are creating impact of the aggregate inflation level of UK. Ultimately, after a lot of introduction of models and researches, it has been finalised that the inflation and exchange rate relationship does get effected on the monetary value of UK's currency.

Fact 1 - NAV (Trust's net asset value) is figured out each business day by the Trustee. The cash (British Pound Sterling Deposits) as the purposes of NAV calculation are translated according to the Noon Buying Rate. It is the rate of U.S. dollar ("USD")/ British Pound Sterling exchange which is set as well as published by the Federal Reserve Bank of New York. That is done at 12:00 PM (New York time), the time when NYSE (New York Stock Exchange) opens for trading operations daily.

Fact 2 - In the period from 1956-1971 a lot of developed countries within the United Kingdom managed to keep a fixed exchange rate system with the gold or US dollar. In 1971 problems caused by limited gold supply appeared again. And in 1973 the system was destroyed when the most major countries refused from the par value system. Than several countries generalized floating of exchange rates, and it caused large instability in currency markets. As it was expected, the Malawi currency devalued together with the devaluation of the British pound to which it was pegged. After this authorities started to think how to manage the exchange rate.

Related topics: