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Bank Of England Reduces The Official Rate By 50 Basis Points To 1.50%

Jan 8 09 6:30 EST (LFB Forex)
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Release Explanation: This is the Interbank overnight lending rate. It sets the tone for mortgages, commercial loans, and all economic lending criteria. An increase in Interest Rate will have the effect of slowing economic growth. A decrease in Interest Rate is used by a Central Bank to stimulate economic growth. Economic strength can create Inflation, raising Interest Rates is one of the easiest way to contain Inflation.

Trade Desk Thoughts: The Bank of England has eased the monetary policy stance by 50 basis points, down to 1.50%, as the market expected. In the current monetary easing cycle, the bank has cut 425 basis points, from a high of 5.75% reached in July 2005. The current interest rate of 1.50% is the lowest on record in the bank’s 3 centuries of history.

In the bank’s assessment, the inflationary pressures have moderated over the course of the last few months, as internal and foreign consumption drops and because of strong declines seen in the energy markets. However, upside pressure from the CPI has been added from the sustained depreciation of the pound and from the new fiscal measures to reduce the Value Added Tax (VAT).

The bank describes the current crisis as the “most serious disruption for almost a century”. Furthermore, most analysts say the bank will continue to cut the interest rate, in order to bring the CPI read back to the 2% target in 2009 and 2010, even though, according to the latest data, the CPI is now standing at 4.1% YoY in November.

Financial analysts suggest the bank might be tempted to follow the Fed and the BoJ into pursuing a quantitative easing policy. However, Chancellor of the Exchequer Alistair Darling declared that neither the government nor the Treasury are supporting such a move.

Forex Technical Reaction: The pound made an 70-pip spike at the time the report was released. Previously, the pound traded flat during the overnight session, moving side by side of the neutral pivot point (1.5065). Against the euro, the pound posted some small gains.

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