What is the reason for the weak pound?

Answer 1

There are several reasons but an obvious one is the lack of investment in the pound by foreign investors. Foreign investors in British banks will expect a return on their money. This is the 'interest rate' that we hear of. Interest rates have a double effect. If they are low, then borrowing is cheaper, people will therefore spend more as they can afford to borrow more, and more people will be kept in work (such as shopkeepers and manufacturers) as a result, thus minimising, as far as possible, the effects of the recession. However, savers will get less interest on their money. If interest rates are high, people will save more as they will get a better return on their investments, but those who borrow money - like most businesses - will find their costs increasing because they have to pay more interest. Therefore they put their prices up to cope, and so inflation - where prices increase and increase year on year - will become a problem. In the present (2009) recession, the Bank of England decided to lower interest rates to such a low amount (the lowest almost in history) therefore helping those who borrow money - like businesses and mortgage payers - and hopefully persuade people to buy more so that fewer traders go out of business and unemployment does not escalate out of control. This means that foreign investors will not invest in pounds because they can get a better rate of interest elsewhere, say, in the Eurozone countries or in the USA. Because of this lack of demand for the pound, its value falls, just as any other commodity would do. A low pound is not necessarily a bad thing. Although it makes imports more expensive as a weaker pound buys less, and foreign holidays are more expensive, the weak pound encourages us to buy British wherever we can, something which is really necessary in a recession to keep our own people in work, and also makes our goods much cheaper to sell abroad - which is again good for exports and the economy. In Harold Wilson's time as prime minister in the 60s, during another bad economic spell, rather than use interest rates, he actually devalued the pound overnight, delaring it worth less the next day. This had the same effect of increasing exports and encoouragiing us to buy more to avoid mass unemployment. There are those who believe that if Britain was in the Eurozone countries it would be better off, but this is not the case, even if the pound becomes the same value (or less) than the Euro. The reason for this is simple. In Europe, the interest rates are governed centrally in a 'one-size-fits-all' system. This means that countries like Greece, Portugal, Ireland and Spain (that are having real problems within this recession), will not be able to control unemployment and lack of spending and so on, as they are all linked to the central European interest rate, and couldn't lower it, or devalue even if their country neared ruin. They will be far worse off during the recession as will Britain as here we have the luxury, being outside of the Euro, of being able to set our own interest rates, and control our own path through the recession without being beholden to anyone else.