Thursday, January 8, 2009

BofE Rate Cut

In a historic move today, Bank of England cut interest rates below 2% for the first time in its 314 year history. This took the UK benchmark rate to 1.5% with the statement issued by the Board referring to the emergence of a deepening synchronized global economic crisis.

As a continuation of the theme we've picked up earlier (see here, and here), the statement also confirmed that credit availability for UK households and corporates continues to tighten, despite historically low interest rates, "pointing to the need for further measures to increase the flow of lending to the non-financial sector".

Unless the ECB carries out a matching 50bps cut in its benchmark rate, expect renewed devaluation of GBP vis-a-vis Euro (see figure below) with last year's highs in the range of EUR/GBP0.93-0.95 back in sight.The latest strengthening in GBP, just as in the case of US financial markets, is likely to remain in a classic bear rally until there is a pronounced change in underlying economic fundamentals, possibly around Q3 2009. Before then, however, there is more room for downward corrections than for an upward momentum implying that GBP will remain weak and volatile against the Euro in the interim, with GBP/EUR parity remaining a distinct possibility. The picture is only marginally better for the USD...

Such a prospect would be of serious concern to Irish exporters, to the economic theory buffs with a (healthy) obsession with stability of the GBP, and to those, planning an escape route out of Ireland Inc and into 'dollarized' world...
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