Why is the pound falling, and does it matter?

It is hard not to be aware of the huge depreciation of pound sterling. Since June 2007 it had fallen to dollar in by 25%. What are the causes and outcomes of this occurrence. In this essay I will quickly outline impact of the recession, balance of payments and the strength of Euro on the depreciation of Sterling. Than I will show how it is likely to influence the UK economy.
The recession is the most important cause of the fall in UK’s exchange rate. Firstly, it is the reason for the MPC had to radically lower the interest rates – as wanted the banks to lend more money. This lowered the demand for the Pound. The expectations are also important factor in the currency exchange market. As the recession hit UK economy most severely, as it is in big percentage depended on the financial services, investors and hedge funds will invest in currencies of economies that are more likely to recover quicker. It is worth considering the fact that there is probability that the Bank of England is going to release more money, to save the economy. This also discourages the potential investors to buy more pound.
Another reason for the depreciation of the Pound is the growing current account deficit that has been increasing since 2007. It causes outflow of foreign currencies form the UK economy, and increased supply of the pound.
In discussing the factors determining the value of the Pound, we have to take into consideration that in last few years, Euro has been getting stronger and stronger, even though its value had declined during the recession, it is much more stable than Pound.
The effects of the depreciation of the UK currency have impact on many domestic markets on the housing market, on tourism, on the educational market, as it is one of the most important determinants of the current account.
As the decrease of value of Pound makes the exports cheaper and the imports more expensive, it probable that there will occur decline in the trade deficit, but this depends on how much spare capacity have the exporters and what is their marketing potential. Those who might gain from the weak pound especially are the Universities as there service is very price elastic – as the students are group that does not have much disposable income and often depends on there parents money. Another group that is likely to gain from the weak Sterling is the tourism industry.
Depreciation of Pound might lead to increase in house prices, as they might be relatively cheaper to for a foreign buyer, it depends on expectations, and forecasts – if people will expect Pound still to be depreciating, they will not invest in the houses in England.