The 0.5% base interest rates being imposed by the Bank of England have been unchanged for more than one year already. The really interesting about this particular level of interest rates is that it is the lowest level in the past three-hundred years. Of course, the main objective of keeping the rates at very low level is to provide greater liquidity by encouraging borrowers to secure loans, which may either be invested or spent. On the other hand, the rising inflation is now exerting pressure on the Bank of England. Raising the interest rates will be inevitable but it should be well-calibrated. Aside from its effect on the stock market and on the forex value of the sterling, increasing the interest rates can have serious impact on the entire economy.

Bond holders and savers will be among those who will immediately benefit if the interest rates are increased. This is because the nominal income from savings and bonds will increase. On the other hand, the bond markets and the value of the sterling in the forex market will also benefit, at least in the short-term. Since the potential incomes from bonds will be higher, many investors will become interested in investing in bonds. The demand for the currency of a country with high interest rates will also increase, thereby strengthening the value of its currency.

Nonetheless, the trading trends in the financial markets are not the most important components of an economy. They are just indicators, which are sometimes over-valued. Those who want to exploit the situation and simply want to make money through the forex market will only benefit in short term because the real economic factors will eventually become obvious. Any market growth that is not backed by actual economic growth such as higher production is destined to fail. It would be just a market bubble supported only by speculations.

Although financial trading thrives in speculations and anticipations, actual wealth is not created by investors and market speculators. The sum of all goods and services as expressed in terms of GDP is the actual wealth of a nation. In the long run, higher interest rates will only become suspicious and may be associated with high investment risks without the backing of other more solid economic factors.

The profitability of the financial markets, including the forex market will only be sustainable if there is actual wealth that is created. Otherwise, unrestrained market growth will only lead to economic collapse. A very low interest rate and a soaring inflation are bad economic combination. The Bank of England has to eventually increase the interest rates to prevent a catastrophic hyperinflation scenario. On the other hand, this is a difficult balancing act because it would surely hurt the credit market as the borrowing costs will inevitably become less affordable. The current situation is pointing to an important turning point in the economy. The era of cheap loans and investment booms (fuelled by over-valued speculations) may soon give way to a more stable and regulated economic trends.