The decision to cut rates by the BoE was widely expected in the markets yet the pound continued to drop even after the release. The MPC's decision to cut interest rates by 25 basis points is an attempt for inflation to reach the 2.0% target for inflation in the medium term. Up until December, the CPI was at 2.1% and with the ongoing rise in energy and food prices; inflation is still expected to rise heavily in the up coming period.
On a broader sense, credit conditions for both households and businesses have tightened and forecasts for output growth have hindered as global financial markets still take the fall. In addition, consumer spending has substantially eased and as the exchange rates for the sterling become lower, import costs will definitely climb. According to the MPC, these will pose downside risks to the outlook for inflation.
But is that what is needed for the U.K. economy? Just a rate cut? Many beg to differ as they see that the cut is welcome but definitely not enough! We can't deny that the shed of 0.25% will help the economy somewhat, but the way that businesses see it, more easing is needed to fight off the threats that the U.K. is facing.
As we see, the U.K. is witnessing similar problems to those recently seen in the U.S. and what have the Feds done? They reduced interest rates by 225 basis points since last September! So is history repeating itself but somewhere else? The action to be taken by the MPC might not be as aggressive but they certainly must watch closely as not to follow the same footsteps that the Feds have once taken and are still taking.
With nothing more to do, hints concerning the inflation outlook and growth will definitely be unleashed in the markets on February 13 when the MPC's quarterly inflation report will be out and we'll at least come a little bit closer to how well the cut aided the economy in keeping inflation below or within the target.
As for the ECB's decision after their monthly policy meeting, it wasn't such a surprise to see them hold their rates steady at 4.00%; and as we all know, the news wasn't what people waited forÃ¢â‚¬Â¦it was Mr. Trichet's speech further elaborating his overview of the situation.
Inflationary threats are still swarming the economy and threatening it of a potential economic slowdown and that is why they chose to leave interest rates on hold. The 15-nations CPI was at 3.2% on an annual basis in January and is well above the 2.00% target the ECB has.
Now that the ECB has decided to do that, it might have to face much criticism from everywhere as many businesses and politicians believe that the central bank is placing the European economy in danger as they're ignoring the assured signs of a slowdown. I don't know if Mr. Trichet is actually ignoring this issue but as we have all seen, he was able to successfully maintain stability in the Euro Zone at times where fellow men in his position have failed to do so.
During a press conference, ECB's President Mr. Trichet said that inflation threats remain tilted to the upside on the medium-term as second round effects still pose threats on price stability. The ECB is read o ace in order to reserve price stability and will be alert but not pre-committed. Incoming data have confirmed that growth risks lie to the downside due to higher oil and commodity's prices in addition to the slowing in growth in other economies has affected the Euro-Zone. Although EU fundamentals are sound, data has still proven downside risks on GDP.
The high inflation in the economy is seen temporary according to ECB president but will most likely remain significantly above the 2.0% in the coming months. Finally, he also stated that he will monitor wage developments with particular attention.
Once again, Mr. Jean Claude Trichet successfully stole the thunder away from the rest as he proved to stand still despite toning down his stance to reach a somewhat balanced turn tilted slightly to high inflation and that his economy will be the sole economy where light will shine upon it. He is not following his peers and who knows? Maybe his tactics prove to be wiseÃ¢â‚¬Â¦