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1.5 percent rate cut: what it means for us

By Dan Johnson

Talk about aggressive moves... Most people expected a half point cut today and some hawkish observers were pushing for a full percentage point to be knocked off the base rate. But the Bank of England has certainly surprised a few people with today's bold move to slash base rates all the way down to 3%.

As the USA buzzes with Obamania and its new-found mania,  today the UK will be awash with excited chatter about how mortgages payments will suddenly become more affordable. Provided banks toe the line and cut their lending rates, many people will indeed be hundreds of pounds better off each month.

This is clearly good news for the economy as a whole and particularly the consumer sector, where people will find they have more money in their pockets and more spending power in the run-up to the critical Christmas season.

That's the positive outcome.

But there is a potential downside, particularly for those working in the overseas property sector. This stems from the potential negative impact that the decision will have on an already weakening currency.

When interest rates are cut, speculators and money-investors tend to move funds to other currencies of a similar risk-profile, where higher rates can be achieved on their deposits. For a long time, Sterling has been a better bet than the Euro, due to the higher rates payable than on the continent. Three quarters of a percent may not seem like a lot in the grand scheme of things, particularly when much higher rates can be achieved in emerging markets. But it's enough to ensure that a sizeable proportion of investors have kept funds in Sterling.

With today's news, the rate for Sterling has now fallen below that for the Euro, which has also been cut by 0.5% to a base rate of 3.25%. There's a good chance that this may weaken both currencies, as investors move funds into other more lucrative denominations, but the impact should be felt most sharply by Sterling. As these investors move out of the currency, its price will fall.

The currency will therefore weaken against others, reducing spending power for Brits abroad. Some say that this has been artificially high for a number of years, after all, why should things really be so much cheaper 25 miles away over the channel?

Any country whose currency moves against Sterling is likely to see further drops in demand from UK buyers, something which may well impact the Euro-Zone in particular. Investors looking to snap up cheap overseas properties will need to keep a close eye on the currency markets in the days and weeks ahead and make sure there money will still go as far as it used to.

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