Thursday, January 8, 2009 0 comments ++[ CLICK TO COMMENT ]++

Bank of England cuts rates to all-time low

Bank of England cut rates to an all-time low since it was founded in 1694. You can get a sense of the magnitude of the problem in Britain. Of all the developed countries, many expect Britain to have the most serious real estate problems.

The Bank of England cut the benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession.

The Monetary Policy Committee, led by Governor Mervyn King, trimmed the bank rate by a half point to 1.5 percent. The result matched the median forecast of 60 economists in a Bloomberg News survey. The pound rose against the euro and the dollar.

It's amazing that the pound strengthened but, then again, the rate cut was not a surprise. The rate cuts are quite a turnaround given how BOE was hawkish on rates over the last few years. In hindsight, their hawkish stance seems to have been a mistake (but I will note that they were boxed into a corner and couldn't move until commodities collapsed and the market, especially the bond market, dumped its inflationist stance.) Similar to America, a huge chunk of the banking system has been in trouble with quite a few banks already nationalized or in the process of being nationalized.

Here is an interactive chart from Guardian of showing rates since 1864. Interesting to note that rates have dropped below the levels during the last big deflationary bust, the Great Depression. However, my understanding is that Britain did not suffer as much has USA during the Great Depression so it makes sense for rates to be lower now.


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