Firstly, I agree that the falling of the Sterling is most caused by the recession in UK now. To deal with the fall in consumer and investor confidence, the MPC has been dropping the rates of interest to the lowest level that we’ve ever seen before, with the aim of pumping cash into the flow of credit in the market. As we know that the interest rate influences the exchange rate because it influences the demand and supply of currencies on the foreign exchange. By cutting interest rates, the immediate result received is the withdrawing of foreign currencies away from the market. Traders tend to move from one currency to another to take advantage of price movements or take advantage of better return in other countries. It leads to the increase in the demand for foreign currency such as Euro and Dollar and the Supply of Sterling increases as well. Therefore, the value of Sterling falls.
With the low exchange rates, UK traders can decline the Trade deficit because of the increase in competiveness in foreign market when the price of exports becomes cheaper. But it might be a bad effect to the economy when the cost-push inflation occurs due to the rise in import prices.
The prices in house market can increase when the interest rates is set low. But it can’t be true for the UK economy in this circumstance. The world house market just experienced big failure leads to the recession spread over many economies and caused the fear of investors about another crisis in this market. So that now, even with the low interest rates that can make them easier to enter this market but with lack of confidence, they will tend to invest on production which is now strongly supported and encouraged by the government.
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