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Trading Lessons

UK Interest Rate Cut Surprises Markets

Interest-Rates / UK Interest Rates Oct 08, 2008 - 09:24 AM GMT

By: Nadeem_Walayat

Interest-Rates The Bank of England took emergency action ahead of the scheduled Monetary Policy Committee (MPC) rate setting meeting tomorrow to cut the UK base interest rate by 0.50%.


Whilst a cut in UK interest rates of 0.50% was widely expected, the rate cut came 24 hours before the expected MPC announcement took the market by surprise which saw an immediate turnaround in the UK FTSE 100 stock market index from being down by 5% reversing to the upside, however the FTSE index has subsequently given up much of the rally but remains above the days early lows.

The UK retail banks are expected to immediately respond by announcing rate cuts for mortgage holders and other borrowers which follows the early morning announcement of the £50 billion bailout of UK banks (as a starting point) in the form of capital injections in exchange for preference shares in the banks. As I voiced in April 08, watch this liability extend to hundreds of billions, which effectively increases UK government debt by 50%.

The UK interest rate cut of 0.50% was coordinated with similar rate cuts of 0.50% by the US Federal Reserve and European Central Bank which was clearly taken as move to halt the panic by delivering the markets and economies an electric shock.

However as I pointed out earlier in the UK interest rate forecast for 2009 that cuts in interest rates and bailouts will result in higher inflation which is already destined to reach 5% this year and therefore puts sterling at a risk of foreign investors starting to view the UK as a big version of Iceland. I first wrote that the Bank of England would be forced to Abandon inflation targeting and cut interest rates regardless as long ago as in May of this year UK House Prices Tumbling- Interest Rate Conundrum

UK interest Rate Forecast for 2009

UK LIBOR Interbank Money Markets Earthquake

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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