Nov

22

what is the Bank of England base rate and why is it important?

Filed Under banking and economics | 6 Comments

If you keep up with the news, especially the business news, you can’t fail to notice the interest that surrounds the announcement of any Bank of England base rate change every month.

I knew that the rate used to be decided by the Chancellor of the Exchequer, but is now decided by a committee. I also knew that if the Bank of England rate changes, so do the rates for both borrowing and saving at high street banks and building societies (the ones that you and I are most likely to use). But, what exactly is it, and why does have the effects that it does?

The Bank of England interest rate is the rate at which the Bank lends money to high street banks.

In the normal run of things, high street banks can’t keep enough money on hand and they have to get some from elsewhere, so that they can lend money to customers and so on. Most of the money they need comes from people with deposits with them, but the system is such that they tend to run short on daily cash flow.

Since the Bank of England prints most of the currency, they essentially control the money supply, and eventually, someone will have to come and ask them to for money. This means that the Bank of England interest rate drives all the other English banks.

how it works, simplified

If you want to borrow some money from a high street bank, it will have to borrow some of that money from the Bank of England. If the interest rate it gets from them is, say 5%, then in order to make a profit, it needs to charge you a little more that, say 5.25%.

Savings accounts rates tend to be a little bit lower from the Bank of England interest rates, say 4.75% in this example, because there are costs involved in running savings accounts.

If you want to know more, you can look at the Bank of England website.

Nov

15

how do you prefer to exchange currency?

Filed Under banking and economics | 9 Comments

I’ve mentioned before that I’m off to Washington DC at the end of the month. Although in my day to day life, I’m not especially frugal, I am a bit of a budget traveller. For 6 days in DC I plan to spend about $400, to include all food and accommodation.

The big question is, how shall I obtain this money in US$?

The way I see it, there are three main options, and of course, I could do a combination of these.

rely on plastic

This would basically mean using a debit or credit card to make purchases wherever possible, and withdrawing small amounts of cash for sundries at ATMs once I’m in the States.

Benefits include not having to do anything before I go, and being able to only change as much money as I need. Downsides are that ATMs may not be available when I want them, my card may get stopped because my bank thinks someone has stolen my card, each transaction involves a fee.

buy traveller’s cheques

I could get buy American Express traveller’s cheques and then cash them once I’m in DC.

This has the advantage of being pretty secure. The disadvantages are that it’s a pain to carry them round, and if I don’t use all the cash I have to fork out two lots of commission.

carry greenbacks

Finally, I could just change some £ sterling for US$ before I leave.

The main benefits are that once it’s done I don’t have to worry about converting any money and I have more time to shop around for the best exchange rate. The disadvantages are that it’s not very secure, and again, if I underspend I’d have to change the money twice.

How do you normally deal with foreign money, and what do you think that I should do?

Oct

2

improving protection for savers

Filed Under banking and economics | 2 Comments

It was announced yesterday that Alastair Darling, Chancellor of the Exchequer plans for 100% of the first £35k of customer’s savings to be guaranteed in the event of a bank failure.  This is clearly in the wake of the Northern Rock crisis, although as I heard it they probably wouldn’t have needed the services of the insurance scheme.

There are also plans afoot to increase the level at which deposits are insured to as much as £100k. I think this is an attempt to prevent a panic in the event of another bank going into difficulties, rather than this having become any more likely.

I’m not really sure what to think about these proposals. I’m generally in favour of increased consumer protection, and persuading the risk averse to put their money into savings accounts rather than hiding it under the mattress is probably a good idea. On the other hand, there is a limited level of familiarity with risk and return in the UK. I wouldn’t like to see people continuing to believe that any action is risk free.

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