BoE Cut Rates to Historical Low of 2%, Finished? Not Yet

As expected, BOE slashed official interest rates by 100 bps to 2%, the lowest level since 1951. Since the BOE was established in 1694, the UK's policy rates have never been below 2%.

The tone in the accompanying statement is dovish. The several main points are:

1. Economic condition has deteriorated and the situation will continue. Although depreciation in the pound helped moderate the impact of global economic slowdown, 'the Committee noted that it was unlikely that a normal volume of lending would be restored without further measures'.

2. Concerning inflation, keeping CPI at 2% in the medium term remains to be the central bank's target. Decline in cost pressure, commodity prices and wage has sharply lowered CPI recently. Subsequent interest rate reduction and currency depreciation on the hand helped raise inflation outlook

3. All in all, the MPC believes that, after weighing the current level of interest rate against the volatility in inflation, there's still risk of undershooting the 2% inflation target. Therefore, the committee decided to pass the 100 bp cut.

We believe it's not the end of the rate cut cycle for the UK as economic conditions both domestically and in overseas are bad and MPC explicitly stated 'further measures' are needed to unfreeze the tightened credit. We expect BoE will cut interest rate further to 1.5% by 1Q09. In fact, the MPC Governor Mervyn King talked on Nov 25 about the possibility of lowering the interest rate to zero for the first time. Moreover, we are also looking forward for other loosening monetary policy such as quantitative easing.