Bank of England Rate Sliced to 1.5% From 2.0%

January 8, 2009

Sterling depreciation appears to have forestalled an even bigger easing of British monetary policy. The statement released today mentions that “substantial depreciation over recent months” will blunt any slowdown in net exports and boost the cost of imports in the future. While observing an intensifying economic contraction last quarter that will continue early in 2009, easier monetary and fiscal policy, sterling depreciation, and lower inflation are projected to “provide considerable stimulus to activity as the year [2009] progressed.” That upbeat conclusion is unusual and a throw-back to the optimistic slant taken by all European central banks until the autumn of 2008. At 1.5%, the new Bank of England rate is 125 basis points higher than the Fed funds target, even though British economic growth is likely to contract more sharply than U.S. growth. In time, today’s action is apt to be judged too conservative.

From a cyclical peak of 5.75%, the Bank of England previously engineered rate cuts of 25 basis points each in December 2007, February 2008, and April 2008, but then held such steady at 5.0% — far too high in hindsight — until early October. The key rate was reduced by 50 basis points in October, 150 basis points in November, and 100 basis points to 2.0% in December. Minutes of this week’s meeting of the Bank’s Monetary Policy Committee will be published on January 21st. The next scheduled rate announcement will be on February 5th, and the central bank quarterly inflation report will be released on February 11th.



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