Exchange Rate

Hot Money

When the base rate in the UK increases, this makes it more attractive to investors who want the highest interest rates possible, so this will cause "hot money" to flow into the UK. This results in demand shifting right since investors are buying the pound.

Figure 1

The same shift also occurs when exports increase, as other countries are buying the pound in order to purchase UK goods / services.

Figure 2

When the base rate in the UK decreases, this makes it less attractive to investors who want the highest interest rates possible, so this will cause "hot money" to flow out of the UK. This causes supply to shift right as investors sell the pound.

The same shift also occurs when imports increase, as UK companies sell the pound and buy foreign currencies, in order to purchase imports.