personal finance

Devaluation: What is it and how does it impact the economy?


Devaluation of a currency can be both deliberate and reactionary. The UK government can decide to devalue GBP if it feels that it is necessary. It can be done by formally setting a lower exchange rate of the currency in relation to foreign currencies

There are a number of reasons why a government would do this.

It could be done to try to offset a worrying trade imbalance, as devaluation will reduce the country’s export costs making them more competitive in the global economy.

This could also in turn lead to a shrinkage in the nation’s trade deficits as imports will become more expensive, leading to a demand for the country’s exports.

Devaluation can also be used to reduce government debt burdens, making the ongoing repayments cheaper which will likely be important for the state at the moment as care packages are rolled out.

READ MORE: Martin Lewis: Savers could beat interest rates cut amid coronavirus

Those trading partners will likely take further measures to offset the damage made to their economy.

In the past devaluation has led to ugly “currency wars”.

A recent example of this can be found in the US – China trade war.

In late 2019, China responded to tariffs imposed on them by the Trump administration. The People’s Bank of China decided to set their currencies rate below seven yuan per dollar which had lasting ramifications.

One of the most common monetary tools used by governments and central banks is cuts made to interest rates. Generally, when a central bank reduces a base rate the corresponding currency is devalued against other currencies across the world. This will likely be the most common reason for currency devaluation.

Central banks across the world have been cutting interest rates for years in an attempt to boost their economies. 

The Bank of England has recently lowered the base rate to 0.1 percent which is unprecedentedly low. While many feel that it should help the economy during this tough period it is not free of negative consequences.

Lowering the base rate has a knock on effect for consumers as retail banks tend to copy what the Bank of England does. This means that savings accounts across the country will have their rates lowered, resulting in cash being quickly out-paced by inflation.



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