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French connections

9th January 2009 | back to article listings BACK    print this article PRINT

It may seem strange to imagine that a cut in the UK interest rate would lead to the pound getting stronger. After all, lower rates usually means the value of investments in a particular currency will be worth less, making the currency itself lose value.

In recent months the pound has been weakening, even before the recent spate of base rate cuts. This has seen the value of sterling drop to around $1.50 and almost to $1. For those keen on investing in overseas property, this has not been good news.

Yet now something paradoxical may be happening. Despite the expectation of a rate cut this week, the pound has rallied, notably against the euro. Even the actual event of the reduction from two per cent to 1.5 per cent has not prevented the continued appreciation of the British currency.

Of course, part of this may be attributed to shifting perceptions about the strength of the eurozone economy. But according to marketing manager of Currencies Direct David Mbaziira, there is more to it.

Speaking to French Property News, he stated: "This interest rate cut will have knock on effects for both buyers and sellers. Those looking to sell their properties in the UK will have increased buying power from the rally seen in the pound. Equally many UK mortgage products will be reduced, potentially acting as an incentive to relocate their assets and their lifestyles."

Mr Mbaziira added: "Vendors and agents, particularly in France, will seek to capitalise on this influx and as an alleged European recession creeps ever nearer prices should stabilise."

That "alleged" recession may be nearer than some think. New figures out yesterday from the European commission showed the Business Climate Indicator in the eurozone to be at its lowest level since 1985. Add to that news that the zone's inflation rate has dropped to 1.6 per cent, while unemployment was up from 7.7 per cent in October 2008 to 7.8 per cent in November and the prospect for further euro rate cuts is strengthened.

For those buying in France, such a decision could have far-reaching implications. With sterling already appreciating and some seeking to "relocate their assets", a further weakening of the euro through rate cuts in Frankfurt this month could see a further reversal of the recent trend. All of a sudden those French properties that seemed out of reach will be less so, while tourists may also feel that holidays there are more affordable, thus boosting the prospects of buy-to-let holiday investors having more tenants. After some gloomy recent times, better news, it seems, is arriving.

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