Bank Of England Cuts Down To 1.00%

Bank Of England Official Rate Actual 1.00%, Expected 1.00%, Previous 1.50%

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 another 50 basis points, down to 1.00%, as the market expected. In the current monetary easing cycle, the bank has cut 475 basis points, from a high of 5.75% reached in July 2005. The current interest rate of 1.00% 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 CPI read is still in danger of “undershooting” to 2% rate at the current interest rate”, the bank has added in the release statement.

The Monetary Policy Committee also observed that “although the transmission mechanism of monetary policy was impaired, the past cuts in the Bank Rate would, in due course, nevertheless have a significant impact”. This is the first time when the Voting Committee has said so, suggesting the recent rate cuts are starting to reach the real economy, to some extent.

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 a 100-pip spike at the time the report was released. Previously, the pound traded flat in the Asian session, but tested the high of the previous day of trading in the European trading hours.

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