Bank of England Cuts Its Rate By 50 Basis Points

February 5, 2009

The Bank of England met market expectations by reducing its Bank Rate to 1.0%, yet another all-time low in the 315-year history of the bank, from 1.5%. In five steps, the rate has fallen from 5.0% since the start of October. Stimulus from these cuts, fiscal relief, sterling depreciation, and lower commodity prices are predicted to exert “a significant impact in due course.”  But the bottom line in today’s decision, which officials explain in a released statement, was a remaining “substantial risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate.” That points to more easing in the future, both a Bank Rate closer to zero and activation of the new APF facility to buy corporate debt and similar assets, which bank officials applauded. The Bank of England will unveil a new quarterly set of forecasts next Wednesday and publish minutes of this week’s meeting on the 18th of this month.

The backdrop for the rapid reduction of short-term interest rates has been a “severe and synchronized global downturn” in which the U.K. is one of the principal victims. The steep drop of GDP last quarter is seen continuing just as rapidly early this year. All components are affected: consumption, investment, housing, and exports. Employment and inventory responses to the recession are adding to the recession’s intensity.

The overall key rate decline of 475 basis points from its cyclical peak compares to drops of 513 basis points in the United States, 225 basis points in Euroland, and 40 basis points in Japan.

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



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