The Bank of England have a reputation for being conservative and gradualists, why but rate by 50bp when two cuts of 25bp will do? However this has now been blown out of the water by yesterday's 150bp cut. This is the biggest rate cut in a long time, although rates have been cut by more basis points before, yesterday's cut dropped the rate by one third taking it to the lowest level in over 50 years. Of course people looking to buy houses, and small businesses, don't borrow direct from the BoE, so the focus now turns to whether the banks will pass on the rate cut to their borrowers. Northern Rock, a government owned lender, has actually put up their lending rates, which may not last too long with outrage being expressed in parliament, and a lot of political, plus social, pressure will be exerted on the banking industry to pass the lower borrowing costs on, not least due to the amount of money pumped into the system by the government.
The cut shocked the markets who didn't know how to react at first. with GBP swinging around wildly after the decision, however once it did settle down it was slightly higher, sitting around 1.24 against the Euro and around 1.60 against the Dollar. Equity markets didn't react so favourably with the FTSE falling 5.7% over the day, and even US equity markets fell by 5%. This could well be due to the IMF slashing it's forecast, only released last month, for next year, and predicting 1.3% fall in GDP from the UK in 2009, and a 0.5% fall in Eurozone GDP. The fall in the equity markets has weighed on the Pound overnight seeing it slip down 5c against the Dollar before recovering to sit around 1.57, and down 2c against the Euro before bouncing back and currently sitting around 1.2250.
The BoE weren't the only central bank making a rate decision yesterday, but after the shock UK cut, the 50bp move by the ECB seemed a bit staid, especially when it emerged that they discussed a 75bp move but decided against it. The Swedish National Bank wasn't to be left out and also cut their lending rate outside of their normal process by 50bp, possibly in fear of their currency appreciating rapidly with deep rate cuts in the other developed economies. The likelihood is that the ECB will cut rates by a further 25bp next month, but the expectation of such hasn't helped the European equities which followed the global trend, with the German DAX falling by 6.8%.
There are a couple of big economic data releases out today, one is the monthly non farm payrolls, and another is the daily setting of the UK Libor rate. The Libor rate has been coming down over the last few weeks but still remains a long way above the base rate, if it starts to come down rapidly then it will ease many concerns over the state of the banking industry, and will make it easier for banks to start lending again.
The non-farm payrolls are expected to be soft, with this weeks ADP employment report showing a large fall. In the last few weeks the Dollar has strengthened on the back of bad news, even bad news from the US economy, but this correlation has started to wear thin, and today's report could see the Dollar weaken this afternoon.
Michael Corcoran |Treasury Solutions | nabCapital