Bank Rate

Bank Rate

Bank rate

The familiar term Bank rate is in fact the percentage of in-terest charged by the Bank of England on certain bills of ex-change, winch in effect are a form of short-term loan. The Bank rate governs the rates of interest charged or allowed (e.g., charged on overdrafts and loans, and allowed on deposits) by banks and other finance houses.

The great importance oldie Bank rate in the nation's economy is that it is an instrument of Government fiscal policy, and can operate as a government economic measure.

By its effect on other interest rates, the Bank rate influences share prices. If the Bank rate is raised, share prices usually fall, causing their yield to be similarly raised. If the Bank rate is lowered, share prices rise, causing their yield to be similarly lowered. Share prices thus adjust themselves according to the Bank rate. Bank rate and share prices fluctuate in inverse proportion.

Changes in the Bank rate are anticipated by the Stock Exchange. Bank rate changes are usually announced at noon on a Thursday, and share prices are marked up or down accordingly.

By watching the economic situation of the country, and taking into account the declared economic policies of the Government of the thy, you should be able to reap advantage by intelligent anticipation of the changes in the Bank rate. Thus, at a time when the country's economy as a whole is deteriorating with a prospect of trade recession, you will expect the Bank rate to be lowered. On the other hand, when inflationary forces are at work, a rise in the Bank rate will be likely.

WHEN TO BUY. If a fall in the Bank rate is anticipated, buy before the announcement and share prices are marked up.

WHEN TO SELL If a rise is anticipated, it may stilt you to sell before the announcement and share prices are marked down.

The rise in share prices on Monday, November 23, 2008 , when

Bank rate was raised from 5% to 7%, was contrary to normal reaction and was due to special circumstances. By the week-end of November 21-22 fear that devaluation would prove inevitable had led to a 'flight from the £' share prices in the meantime having been dropping sharply. The announcement of the 2% increase in the Bank rate, coupled with the news that the Government had negotiated the £3,000m loan, at once removed the threat of immediate devaluation and the 'relief to market sentiment' was reflected in a temporary rise in share prices.


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