As the market expected, the Bank of England cut interest rates by 25 bp to 5.25 percent and the European Central Bank left interest rates unchanged. Concerns about growth from both central banks caused the Euro and British pound to sell off aggressively.
The Bank of England cut rates in line with expectations by 25bp to 5.25 percent, marking the second effort to make policy more accommodative since December. The central bank cited deteriorating prospects for global output growth and tightening credit conditions for consumers and businesses alike. While the Monetary Policy Committee did say that rocketing energy and food prices are “expected to raise inflation, possibly quite sharply,” the subsequent cooling effect on demand growth is anticipated to be enough to “return inflation to target in the medium term.” Essentially, the Bank of England is more concerned that slowing growth will bring inflation below target than they are concerned that inflation will accelerate out of control, suggesting that more rate cuts may loom on the horizon as long as economic data points to deteriorating conditions.
The British Pound has traded choppily above 1.95 on the news, as it appears that the bulk of this rate cut was already priced in to the GBP/USD pair, though a drop towards another layer of support below at 1.9475/80 is not out of the question.
Discuss the decision with other traders and DailyFX Analysts in the GBP/USD Forum.
For the full text of the minutes, visit the Bank of England's website.
ECB President Trichet's gloomy outlook for growth caused the Euro sell off aggressively. He has finally bowed to market pressures and recognized that resiliency of the Eurozone to slower US growth is cracking. More specifically, Trichet said that there was uncertainty on financial crisis' growth impact and the risks to economic growth are to the downside. The Euro rebounded when he spent the second half of his statement talking about inflation and how the Governing Council remains committed to preventing second round effects. However in the short term, his comments will not satisfy Euro bulls and his recognition that growth will continue to slow has already sent the Euro below 1.45. In the medium term, we still expect the Euro to recover strength as traders wo want to sell US dollars realize that its a dangerous game with Eurozone interest rates 100bp higher than US rates and growing.
More Comments from Trichet
- DATA CONFIRMS MEDIUM TERM UPSIDE PRICE RISKS
- RISKS TO INFLATION ARE TO THE UPSIDE
- SHORT TERM INFLATION MUSTN'T SPILL OVER
- FIRM ANCHORING OF INFLATION EXPECTATIONS KEY
- ECB REMAINS COMMITTED TO PREVENTING 2ND ROUND EFFECTS
- STILL UNCERTAINTY ON FINANCIAL CRISIS' GROWTH IMPACT
- RISKS TO ECONOMIC OUTLOOK ARE ON DOWNSIDE
- ECB TO MONITOR ALL DEVELOPMENTS VERY CLOSELY
- DATA SIGNAL GROWTH MODERATING
- SLOWDOWN ELSEWHERE WILL IMPACT EURO-AREA
- UNCERTAINTY ABOUT MARKET TURMOIL UNUSUALLY HIGH
- FUNDAMENTALS IN EURO-AREA REMAIN SOUND
- EURO-AREA HAS NO MAJOR IMBALANCES
- INVESTMENT AND CONSUMPTION GROWTH SHOULD KEEP HELPING ECONOMY
- UNCERTAINTY ABOUT GROWTH ARE UNUSUALLY HIGH
- FURTHER OIL PRICE RISES AMONG DOWNSIDE RISKS
- INFLATION WILL STAY ABOVE 2% INCOMING MONTHS
- ECB EXPECTS PROTRACTED PERIOD
- RISKS TO PRICE DEVELOPMENTS LIE ON UPSIDE
- TIGHT LABOR MARKET, HIGH CAPACITY USE IS PRICE RISK
- FIRMS PRICING POWER MAY BE STRONGER THAN EXPECTED
- IMPERATIVE EVERYONE AVOIDS 2ND ROUND EFFECTS
- M3 GROWTH REMAINS VERY VIGOROUS