Sterling weakens sharply against dollar after BoE cut rates by 50bps to 0.50% as expected. However, the bank indicated in the statement that even after today's rate cut, there is substantial risk of undershooting the 2% CPI inflation target in the medium term. Hence, at the same time, BoE announced a 75b pound asset purchase program, formally started quantitative easing, to boost supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term. The asset purchase program will take up to three months to carry out. Majority of the 75b pound fund will be used to by medium- and long-maturity conventional gilts while part of the fund will be used to finance private sector asset purchases through BoE's Asset Purchase Facility. The bank will monitor the effectiveness in boosting money and credit supply and adjust the speed and scale of those purchases.
Elsewhere, market optimism fades after disappointment from lack of new stimulus package from China. Dollar strikes back on risk aversion following weakness in European stocks where major indices are dropping more then 2%. Focus now turns to ECB rate decision and press conference.
Released earlier, UK, Halifax house price contracted 2.3% mom in February (consensus: -2%), following a rise of 1.9% a month ago. On annual basis, 3 month average prices dropped 17.7%, the biggest decline in 26 years. The reading indicated that housing market in the UK remained grim despite several months' of price cutting.
Germany's retail sales surprisingly plunged 0.6% mom in January, compared with consensus of a 0.2% gain and a revised 0.5% growth in December. On yearly basis, the reading was down by 1.3%, also below market expectation, after a 0.3% drop in December. Deepened recession in Germany and rising unemployment greatly constrained spending. This trend will likely continue in coming few months. Real GDP in the Eurozone is confirmed to have contracted 1.5% in 4Q08 after a decline if 0.2% in the previous quarter as both domestic consumption and demand from overseas countries shrank significantly. The gauge plunged 1.3% yoy, slightly worse than preliminary reading of -1.2%.
Looking ahead, In US session, initial jobless claim probably fell to 650K for the week ended Feb 28. However, from 4-week average of 644K, it showed that the trend continued to go up . 4Q08 productivity is anticipated to have revised down to 1.6% qoq from 3.2% because of downward revision in business sector output and longer working hours. Unit labor cost in 4Q, on the other hand should have revised up to 3.4% from 1.8%. In January, factory is expected o have contracted 1.6% after a drop of 3.9% in December. Building permits in Canada should have slid 5% in January following a 3.9% decline in the previous month while Ivey PMI probably improved to 38 in February from 36.1 a month ago.