The recent rise in interest rates decided at the Bank of England's Monetary Policy Committee (MPC) meeting ended on 1 November 2017 has had a consequence for international money transfer companies. Among other effects more or less already discounted by operators in the currency and financial markets, currency specialists are facing an unprecedented decrease in their capital flows.
Since the announcement of an increase in interest rates, albeit minimal, that increased Bank Rate by 0.25 percentage points, to 0.5%, there has been a drastic decrease in foreign exchange transfers from the United Kingdom to foreign countries. The usual destinations in Europe, which see Spain and France as the main destinations for transfers, have been mainly hit, but also transfers to the United States, which usually has a substantially stable flow, have seen a decline. All operators in the currency exchange sector are suffering heavily.
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Why arbitrage?
Arbitrage is by definition a zero-risk investment technique, but opportunities are generated by market imperfections. If a commodity or currency price discrepancy is created on two different markets, buying the same amount of currency, for example, on one market and selling it on the other at the same time generates a profit corresponding to this option. Usually these differences are extremely small and highly volatile.
This is why large amounts of capital are needed and, above all, the speed of action that only large players can afford in a context where modern communication technologies have significantly reduced the possible discrepancies between markets. Moreover, the addition of arbitrage transactions tends to reduce the discrepancy in question by raising the price in one market and lowering it in the other, thereby rapidly restoring the balance between the two markets.
The standstill in transfers intended for the exploitation of arbitrage is therefore significant because some reference margins have changed and operators can perceive these opportunities differently compared to other types of investment. Other alternative financial products may have become more attractive as a result of the BoE's interest rate hike. The mere perception of a lower risk for one product category compared with the profit generated may have shifted capital flows from the international currency transfer market to other financial transfers, hence the uncertainty between a simple and transitory waiting phase or a possible new scenario.
Currency forwarding for buying properties abroad
The appetite for good investments in properties abroad does not seem to have decreased in the UK.
Consequently, if a mortgage has not been secured directly in the foreign country where the property is to be purchased, the domestic market must be used. And owing to rising interest rates, the public could most likely remain waiting for the time being to better assess their positions to apply for a new mortgage or renegotiate the existing one. This would therefore also explain a decrease in foreign currency transfer requests for this purpose adding more pressure to already struggling currency specialists and brokers.
