While lending rates in the UK are set by the Bank Of England, and revised as and when applicable at their regular monthly meetings, there are a few indicators to help forecast any imminent interest rate changes. While to the public eye these interest rate decisions happen overnight, upon further investigation the markets are very much in tune with potential changes.
As well as the economic outlook for the UK, which is more of a longer term indicator for interest rate movements, it is the currency and the money market which will give you the best short term indicator.
FOREX: Money Markets
The money markets are basically the commercial side of the financial industry, the area where lenders and borrowers are brought together. Via a number of different means, the money markets are very sensitive to what is going on at ground level with regards to the economy, outlook, prospects, etc.
These means include, rumblings form contacts at the Bank of England and actual lending transactions from the Bank Of England - which seem to follow certain patterns prior to interest rate changes.
Seasoned market observers are able to read the signs, and you will very often see “money market rates” moving away form Base Rates, and indicating the future direction of rates.
Currency Markets
Currency markets are basically the basis for UK companies trading abroad, and foreign companies trading in the UK. These rates can have a major impact on local currency denominated profits when UK companies convert back to sterling and overseas companies convert back their own currency.
While the majority of figures which are announced in the UK press refer to the UK economy, overseas inward and outward investment is vital to the success of the domestic UK economy. It is therefore vital the currency rates are supported in order to arrive at the “correct” optimum level. The level which allows UK companies to be competitive overseas, and also encourages foreign investment into the UK.
Just like the money markets, the currency markets are also very sensitive to actual and potential changes in UK base rates, and currency rates are often prone to movement ahead of changes - offering another useful indication.
To the naked eye it may seem that interest rate changes are decided at each monthly meeting, when in fact they have probably been materialising for months, only requiring final confirmation. The transparency of economic data now a days has allowed a number of market observers to develop an understanding of the signs associated with interest rate changes.
