Bank Of England Eased The Monetary Stance By 100 Basis Points

Bank Of England Official Rate Actual 2.00%, Expected 2.00%, Previous 3.00%

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 100 basis points, down to 2.00%, as the market expected. So far, in 2008, the bank has cut 325 basis points to the current interest rate of 2.00%, which is the lowest since 1951.

The decision comes after the Bank of England started to ease the monetary policy back in July 2007, from 5.75% to gradually reach the current interest rate. 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 for 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 Policy Committee assesses that the decision to reduce the VAT would increase the volatility of the CPI read over the next two years.

The bank describes the current crisis as the “most serious disruption for almost a century”. Furthermore, most analysts say the bank will continue to cut the interest rate, in order to bring the CPI read back to the 2% target in 2009 and 2010, even though, according to the latest data, the CPI is now standing at 4.5% YoY in October, down from 5.2% just one month earlier.

Forex Technical Reaction: The pound made an 80 pip spike at the time the report was released. Previously, the pound fell 300 pips in the European session, touching a new low for the current year both against the dollar and the euro.

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