The Bank of England announced the decision to cut its interest rate by 50 basis points for the second month in a row today. Today’s rate reduction brings the rate to 1.00 percent from 1.50 percent and marks the lowest interest rate level since the establishment of the bank in the late 1600s. The rate cut was widely expected and matched the market forecasts which were predicting a 50 point reduction. The BOE has now sliced off 4.00 percent from its interest rate since October in a bid to help the declining British economy.
The BOE statement accompanying the rate decision commented on the economic conditions stating, “In the United Kingdom, output dropped sharply in the fourth quarter of 2008 and business surveys point to a similar rate of decline in the early part of this year. Credit conditions faced by companies and households have tightened further. The underlying picture for consumer spending appears weak. Businesses have responded to the worsening outlook by running down inventories, cutting production, scaling back investment plans and shedding labour.”
The BOE statement also said that the annual consumer inflation rate declined to 3.1 percent in December and should slide below 2.0 percent later this year. The bank said that the sharp decline of the pound sterling has increased the cost of imports but will help spur economic growth as the year goes on.
The European Central Bank, meanwhile, decided to leave its interest rate steady at 2.00 percent today in a widely forecasted move. Today’s rate hold follows recent rate reductions by the bank on January 15th by 50 basis points and on December 4th by 75 basis points. The ECB has cut 225 basis points off its interest rate since October trying to ease the effects of the eurozone economic slowdown. The eurozone officially fell into recession in the third quarter when GDP declined by 0.2 percent following the second quarter decline of 0.2 percent.
Jean-Claude Trichet, the President of the ECB, talked in his press release today about the eurozone economy as he said, “As anticipated in our interest rate decision of 15 January 2009, the latest economic data and survey information confirm that the euro area and its major trading partners are undergoing an extended period of significant economic downturn, and that accordingly both external and domestic inflationary pressures are diminishing. We continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon, thereby supporting the purchasing power of euro area households.”
Despite holding the rate steady today, the ECB is expected to reduce the rate again in its March meeting although Trichet does not feel the need to follow the U.S. and Japan to almost zero as he stated in his press conference today that, “Zero interest rates at the moment I am speaking is not something that we would consider appropriate.”
Currencies Today: Euro falls and Pound advances.
The currency trading markets today saw the British pound advance in trading today against the other major currencies following the interest rate announcements while the euro has declined in trading.
The pound has advanced versus the US dollar for the third day in a row as the GBP/USD trades at the exchange rate of 1.4621 at the end of the U.S. trading session at 4:53pm EST after opening the day at 1.4445(00:00GMT). The euro has lost ground today to the pound as the EUR/GBP trades at 0.8746 after opening the day at 0.8886. The pound has gained versus the Swiss franc as the GBP/CHF has gained over 300 pips from its opening rate of 1.6763 to trading at 1.7109. The pound has also climbed against the Japanese yen today with the GBP/JPY advancing from 129.10 to trading at 133.19. Against the Canadian dollar, the pound has increased from 1.7804 to trading at 1.8001.
The euro, meanwhile, has declined against the US dollar today as the EUR/USD trades at 1.2790 after opening the day at 1.2836. The euro has declined versus the Canadian dollar as the EUR/CAD trades at 1.5769 after opening at 1.5818. The euro has also declined versus the Australian and New Zealand dollars as the EUR/AUD trades at 1.9603 from 1.9938 and the EUR/NZD trades at 2.4765 from the 2.5143 opening.
Against the Swiss franc, the euro has gained from 1.4899 to trading at 1.4968 while the euro has also advanced today versus the Japanese yen as the EUR/JPY trades at 116.60 from the 114.73 opening.
EUR/GBP Chart – The Euro falling against the British Pound in Forex Trading today after the Bank of England cut its interest rate and the European Central Bank held theirs steady.