Release Explanation: This is the Interbank overnight lending rate. It sets the tone for mortgages, commercial loans, and all economic lending criteria. An increase in Interest Rate will have the effect of slowing economic growth. A decrease in Interest Rate is used by a Central Bank to stimulate economic growth. Economic strength can create Inflation, raising Interest Rates is one of the easiest way to contain Inflation.
Trade Desk Thoughts: The Bank of England has eased the monetary policy stance by another 50 basis points, down to 0.50%, as the market expected. In the current monetary easing cycle, the bank has cut 525 basis points, from a high of 5.75% reached in July 2005. The current interest rate of 0.50% is the lowest on record in the bank’s 3 centuries of history.
In the bank’s assessment, the inflationary pressures have moderated over the course of the last few months, as internal and foreign consumption drops and because of strong declines seen in the energy markets. However, upside pressure from the CPI has been added from the sustained depreciation of the pound and from the new fiscal measures to reduce the Value Added Tax (VAT). “The CPI read is still in danger of undershooting to 2% rate at the current interest rate”, the bank has added in the release statement.
At this meeting the bank also discussed the possibility of creating money to buy debt instruments from the U.K. financial market. The central bank authorized the use of 75 billion pounds, out of a possible 200 billion pounds, which would help the bank follow a quantitative easing policy. The money would be used to buy corporate and government debt over the next three months, and will be provided in part by the U.K. Treasury.
Forex Technical Reaction: The pound made a 90-pip spike at the time the report was released. Previously, the pound had fallen 100 pips in the European session, in-line with the rest of the majors.