Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Bank of England's 1.5% Interest Rate Cut to Prevent Severe Recession

Interest-Rates / Recession 2008 - 2010 Nov 09, 2008 - 07:05 AM GMT

By: Victoria_Marklew

Interest-Rates Best Financial Markets Analysis ArticleThe Bank of England's Monetary Policy Committee (MPC) acted decisively Thursday morning, cutting the Bank Rate 150bps to 3.00% - its lowest level in over fifty years and the largest rate cut since the Bank gained full policy independence in 1997.

Chart 1

The MPC statement noted the "very marked deterioration in the outlook for economic activity at home and abroad" and the fact that the risks to inflation "have shifted decisively to the downside," leading to a "substantial risk" that headline CPI would undershoot the 2.0% target in the medium-term. The Committee pulled no punches, describing the sharp fall in output in the UK in the third quarter, the recent tightening in money and credit conditions as a result of the serious disruption in the global banking system, and business surveys and reports that point to "continued severe contraction in the near term."

The economic data have certainly been unremittingly gloomy in recent weeks. Today came the Halifax house price report for October, which revealed that prices fell 2.2% on the month (the ninth successive decline) and 14.9% on the year - the steepest fall since the series began in 1983. Halifax calculates that prices have now fallen 15.7% from their peak, which means that many thousands of homeowners probably are already in negative equity (where the mortgage exceeds the value of their home).

The financial services sector has played a key role in underpinning the UK's strong and steady economic growth in recent years. Reading between the lines, the MPC is concerned that the financial sector's woes, combined with a global demand slump, risk pushing the UK into a severe recession. We doubt that today's rate cut is the last. There may be an indication of the Committee's policy outlook in the minutes of today's meeting, which will be released November 19. The BoE's Inflation Report, to be published November 12, will include the Bank's latest forecasts for output and inflation.

ECB Cuts Again But Accelerating Slowdown Points to Further Easing in December

As expected, the European Central Bank (ECB) lowered its refi rate again Thursday, taking it down 50bps to 3.25%. In his subsequent press conference, Governor Trichet stated that the Council discussed cutting by 75bps but was unanimous in its decision to lower by 50bps. Unlike in the UK (see above), the minutes of this discussion will never be released, but it appears that the Governing Council missed a chance to move more aggressively.

Chart 2

Earlier this week the European Commission released its latest economic forecasts, anticipating real GDP growth of just 0.1% for the 15-member Euro-zone next year, and 0.2% for the 27-member EU. Q3 GDP data are due November 14, but the Commission stated that the Euro-zone is already in a technical recession. Assuming that the Q3 data are as weak as expected, and given the extent to which forward-looking data are deteriorating, the ECB is likely to ease again at the December 4 policy meeting.

One indication of the severity of the looming downturn across the Euro-zone is the state of German manufacturing orders. Today came the news that September's orders posted their biggest monthly fall since 1990, plunging a seasonally-adjusted 8.0% on the month, led by an 11.4% drop in foreign orders.

Chart 3

Swiss National Bank Opts For Intra-meeting Rate Cut

The Swiss National Bank (SNB) announced an intra-meeting rate cut Thursday, lowering its target band for three-month Swiss franc LIBOR to 1.50-2.50%, down from 2.00-3.00% previously, and aiming for the mid-point - effectively, a 50bps rate cut to 2.00%.

Chart 4

Although Swiss inflation eased by less than expected in October - the headline rate came in at an annual 2.6%, down from 2.9% in September - there are plenty of other signs for a more marked decline in inflation and that the economy is headed for recession going into 2009. The SNB stated today that the global economic outlook "has deteriorated more severely than anticipated" and warned that in Switzerland "growth in 2009 might even be negative."

Earlier this week the SVME Purchasing Managers' Index showed that Swiss manufacturing contracted for the second consecutive month in October. The PMI fell to 47.0, down from 47.8 in September and its lowest since mid-2003. The last time the PMI remained below 50.0 for two consecutive months was back in the summer of 2003, when the economy was struggling out of a prolonged period of weak-to-negative growth. That was also the last year the Swiss economy posted a full-year contraction.

Last week the KOF Economic Institute released its latest leading indicator, which points to the economy's likely performance in six months' time. The October indicator dropped to 0.35 from 0.52 in September, its lowest level since July 2003.

Chart 5

With Switzerland's major export markets slowing sharply the economy is set to fall into recession around the turn of the year, and could be in for more than two consecutive quarters of negative real GDP growth. If current trends continue, the SNB is likely to ease again at its next scheduled policy meeting on December 11.

By Victoria Marklew
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Victoria Marklew is Vice President and International Economist at The Northern Trust Company, Chicago. She joined the Bank in 1991, and works in the Economic Research Department, where she assesses country lending and investment risk, focusing in particular on Asia. Ms. Marklew has a B.A. degree from the University of London, an M.Sc. from the London School of Economics, and a Ph.D. in Political Economy from the University of Pennsylvania. She is the author of Cash, Crisis, and Corporate Governance: The Role of National Financial Systems in Industrial Restructuring (University of Michigan Press, 1995).

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Victoria Marklew Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules