It is almost as if there is a new man in town at the BoE. Yesterday, I argued that the BoE could cut by 100bp and they even blew away that outside expectation.
Earlier this year, Mervyn King was still being criticized for being behind the curve. A month ago, he shed that image by announcing plans to take equity stakes in banks. King realizes that he has a seismic challenge ahead of him and today's move confirms that the economy is in a recession. This has compelled the BoE to take an insurance out on future growth by making a much larger than expected rate cut.
UK interest rates are now at 3.00%, the lowest in 55 years! What makes today's move even more groundbreaking is the fact that the BoE has never cut by more than 50bp since it was granted independence, and did not cut by more than 100bp even during the last recession in the early 1990s. King is sending a strong message to the markets that they can trust him to proactively fight off the recession.
Why Did the GBP Rally?
Interestingly enough, even though the British pound collapsed following the rate decision, it recovered dramatically in the minutes following the release. With every major central bank taking interest rates towards zero to 1 percent, the BoE's move today restored confidence in the UK monetary policy committee. They have delivered a significant stimulus to the UK economy and the currency market is happy with it. We would not rule out further rate cuts by the Bank of England, but certainly not by the same degree that we have seen today.
Swiss National Bank Cuts Rates by 50bp
Lost in the fanfare of the BoE and ECB rate cuts today, was the 50bp rate cut by the Swiss National Bank. The target range for interest rates is now 1.5 to 2.5 percent. The central bank is concerned about growth and suggested that it may even be negative next year. This tells us that they are also looking forward to further rate cuts.
Kathy Lien
http://www.gftforex.com
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