Bank of England Likely to Cut Key Rate 50 Basis Points to 1.0%

February 4, 2009

Bank of England officials considered adopting a wait-and-see stance in January and unanimously rejected that option in the face of extraordinarily weak economic activity and the possibility that doing nothing would hurt what little investor confidence remained about the future.  So the rate was cut by 50 basis points to 1.5%, the lowest level ever in the Bank’s 315 years of existence.  The Bank rate had been at 5.0% as recently as early October.  Stimulus from rate cuts since then will be augmented by 14.3% of trade-weighted sterling depreciation, but virtually all of that net move had happened by the time of the January meeting.  Bank of England officials do not share the misgiving of their ECB counterparts about taking rates nearer to zero.  It’s not that they do not understand the difficulty of raising rates from such low levels as Japan has proved.  The point is that deflationary risks of not cutting rates in present circumstances are deemed to be even more formidable.  One of the nine policymakers, Blanchflower, urged his colleagues to cut by 100 basis points last month.  Officials will have a new set of quarterly staff projections this month, and such will show that at present interest rates, medium-term inflation is more likely to be lower than the 2% target than above it.  The fear expressed in January that investors would be dismayed if the Bank of England failed to cut rates would be even more valid this month because of the fresh forecasts, and fear of igniting a sell-off of sterling will be somewhat diminished in light of the currency’s surprising buoyancy since the Committee met in January.  The size of the cut is unlikely to exceed 50 basis points, which is what most street analysts are predicting, but officials now have the wherewithal to engage in significant quantitative easing to depress longer-dated interest rates when and if the time to do such arrives.  A 1% Bank Rate is unlikely to be the ultimate cyclical floor.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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