Whether you’re looking to buy a house overseas on the coast to soak up some vitamin D, or you’re just wanting to move money abroad on a regular basis, you’ll want to ensure you’re getting a great exchange rate. But could you soon receive less currency for your money because of central banks and their interest rates?It’s not uncommon for a currency to rally if its respective nation’s central bank decides to increase interest levels; likewise, it can plummet if rates are cut too. So how do you know what’s going to happen?
Interest levels are usually adjusted for a few reasons, but markets haven’t witnessed many rate rises since the Global Financial Crisis (GFC) in 2008. This means speculation as to whether a central bank might increase its cash rate can create a lot of market movement. In the past few years alone, the pound has rallied uncontrollably and the US dollar has been buoyed significantly, all from hopes of higher rates.
Below is a guide to central banks and their 2017 interest rates.
Bank of England
Current interest rate: 0.25%
The Bank of England (BoE’s) current rate may be just a shade above zero now, but it hasn’t always been that way – back in July 1980, rates were rising high at 16.00%! In the modern day, rates have been significantly more controlled, sitting at no more than 6.00% since the year 2000. However, the Global Financial Crisis crushed economies and 2008 saw a number of downward adjustments to central bank rates, including the BoE’s. On Wednesday 8th October 2008, the Monetary Policy Committee (MPC) made the decision to drop the bank rate from 5.00% to 4.50%. In November, this was followed by a massive 1.50% adjustment down to 3.00%, and by March 2009 UK interest rates had been downwardly revised to 0.50% where they remained until August 2016.
As a result of the Brexit vote, policymakers opted to pressure rates lower to 0.25% last year. The pound plunged as markets digested the first rate cut since 2009. A year on from that decision, markets are gearing up for higher rates again. In June, policymakers very narrowly avoided a rate rise when three voted for higher rates and five voted to maintain the current levels. The pound jumped to a one-week high against the euro (GBP/EUR) and comments since then have had the power to bolster sterling higher still.
There have been a number of factors in the argument of whether to hike rates or not. Firstly, after the Brexit decision the pound fell by around 20% against other major currencies and is still sensitive to developments in negotiations now. A weaker currency created higher consumer prices on all things imported and rampant inflation levels are currently considerably outpacing UK wage growth. This is one reason the Bank of England may consider lowering rates – to manage inflation. However, with wages growing lethargically, it’s unlikely the BoE will begin hiking up interest rates. Each month when the UK releases its official wage growth and labour market stats the market waits on tenterhooks – a stronger labour market with burgeoning wage growth would give the Bank of England more of a case to increase rates.
However, with Bank of England Governor Mark Carney having suggested in the past few months that rates may need to increase, markets will be very closely watching economic data and scrutinising minutes from the policy meetings.
How could it affect your house purchase abroad?
If you’re looking at buying a house abroad, your exchange rate is incredibly important. As an example, if the BoE does raise rates and the pound to euro (GBP/EUR) exchange rate moves from high levels of 1.11 into 1.13 territory (the GBP/EUR rate fell by 1.60% when the bank pushed rates lower in 2016), your £250,000 house hunting budget could vary from €277,500 to €282,500.
The Reserve Bank of Australia
Current cash rate: 1.50%
The Reserve Bank of Australia (RBA) is in a sticky situation – the Australian economy’s house prices are overheating (prices in Sydney are averaging at AU$1.18 million, double what they were nine years ago) and interest rates are low, but citizens are saddled with large amounts of debt. So can the RBA increase rates? It wouldn’t be an easy task for the central bank considering it would squeeze households further, and there are already significant levels of credit. Meanwhile, if the housing market looks like it might have a bubble, there’s pressure to increase rates to quell that.
There’s also the matter of the Australian dollar’s overvaluation – the RBA has stated that the Aussie has strengthened too much on numerous occasions, and the remarks are not without cause. The Australian dollar has risen by 7% against the US dollar since May alone! Although the RBA has tried talking down the value of the Aussie, an act known as jawboning, it’s only modestly decreased in value. Some economists are now suggesting that although many had expected the RBA to keep rates on hold until the second half of 2018, there’s also the very real possibility that a burgeoning housing market could force the central bank to hike the official cash rate (OCR), something that may buoy the Australian dollar further.
How could it affect your house purchase abroad?
The Reserve Bank of Australia isn’t likely to raise interest rates until the Australian economy is performing well and real wages are growing; but therein lies the problem—real wages have been falling.
The central bank is likely to preserve the growth the economy has achieved of late, and ensure when it raises rates, wages are growing consistently quicker than inflation. However, central banks can be unpredictable, and if the RBA does choose to hike rates sooner rather than later, a property in Australia could end up costing you more than you’d expected, in terms of both Australian mortgages and exchange rate fluctuations.
In the last year alone, the pound to Australian dollar (GBP/AUD) exchange rate has varied between levels of 1.59 and 1.77. As an example, at the start of August 2017 the exchange rate was trending at levels of around 1.64, which would get you somewhere in the region of AU$410,000 for £250,000. However, if the Aussie shoots up with a rate hike and the UK is still plagued with Brexit developments, the rate may reside in the region of 1.60, which would get you AU$400,000. That’s AU$10,000 you could use for moving costs, decorating, or just save for a rainy day.
The Federal Reserve
Current interest rate: 1.25%
The Federal Reserve has already hiked interest rates a few times this year, but another push higher could help the US dollar to rally once again. Recent labour market data (a key indicator for the Fed when considering higher rates) has been positive, and continued tightness in employment could help to encourage the central bank to raise rates again this year in line with predictions from many industry experts. The US dollar has softened a little recently as economic data has been less inspiring than it was, which has led to speculation as to whether the bank is still on course to raise rates. Recent data has shown an upswing in job growth, but wage expansion is still lethargic. Market experts are forecasting another rate rise in December of 0.25%.
How could it affect your house purchase abroad?
If you’re looking at buying a house in the US, you may find that the exchange rate makes a big difference in the year ahead. In the past year, the pound to US dollar (GBP/USD) exchange rate has fluctuated between 1.20 and 1.34. At the time of writing, it’s hovering at around 1.30, which means £250,000 would get you roughly US$325,000, but if the US hiked interest levels and the UK continued to produce weak data and struggle under Brexit pressures, the exchange rate might fall to levels of 1.26, giving you US$315,000.
The European Central Bank
Current interest rate: 0.00%
The European Central Bank (ECB) has been notoriously dovish for some time. Since the Global Financial Crisis, neither the Eurozone or the UK have seen higher interest rates, only cuts. Furthermore, the Eurozone struggled for some time with weak inflation and flatlining economic growth, as well as having several nations riddled with debt or facing crises of their own, such as Greece.
However, 2017 has seen the Eurozone not only turn things around, but also be at the front of the pack in terms of economic growth and developments. In addition, the Eurozone has avoided two potentially disastrous election outcomes in the Netherlands and France that could have caused chaos with the euro exchange rate. With populist threats defeated and polls predicting a smooth election in Germany in the autumn, it seems the euro exchange rate is in a good position to gain against other majors.
Investors and industry experts are anticipating the unwinding of the ECB’s stimulus programme which should boost the euro exchange rate further. But some have suggested that the ECB needs to hike interest rates too.
Chairman of Rabbobank Wiebe Draijer commented: ‘Right now consumers are confused, they don’t understand negative interest rates, they don’t understand a zero interest rate and the system becomes volatile as a result, we shouldn’t have that.’
How could it affect your property purchase abroad?
In the past year, the pound to euro (GBP/EUR) exchange rate has traded between the boundaries of 1.10 and 1.19, but has moved a significant amount in the space of weeks because of central bank comments. Between July and August 2017, the rate fell from 1.14 to 1.10, spurred by Bank of England rate disappointment and weak UK figures, amid a backdrop of Eurozone strength and the potential end of quantitative easing. As a currency example, £250,000 at a rate of 1.14 would bring in roughly €285,000, whereas the same amount at 1.10 would only bring in approximately €275,000.
How can you transfer your funds abroad for a house purchase and get a great rate?
Whether you’re looking at buying a two-bedroom townhouse with hardwood floors and a Juliet balcony, or you want to buy a sprawling chateau in the Parisian countryside, when you look at buying property overseas it’s important you get a great exchange rate to make it as cost-effective as possible.
Speaking to an industry expert is a good first port of call to find out what factors could affect your transfer and see how you can protect your funds in case of a negative market shift. FC Exchange assigns all its clients with their own market specialist so that they can put their questions to someone who watches market movements every day. Your currency expert can help you to navigate the market and will keep you up to date with all the latest exchange rate developments so you can choose the most opportune times to make your transfer.
For property buyers, there’s another helpful reason to speak to a broker – you can lock in an exchange rate up to two years in advance, to eliminate some of the worry and stress that can come with buying a property abroad. When you agree to buy, it may cost you one amount, but by the end of the legalities and the purchase process, the exchange rate could have shifted meaning the amount you pay for your house is very different to what you thought. By choosing a forward contract, you can secure a great rate on offer now, and have peace of mind that you know exactly how much currency you’ll receive for your money when you make the decision to transfer your funds, whether that’s in a month or 20 months!