Bank of England Cuts Interest Rates by Quarter Point

The Bank of England cut interest rates by 25bp for the first time in 2 years, marking a sharp shift in monetary policy. Yet, the British pound failed to extend Thursday’s losses because the statement made by the BoE did not suggest that they will ease monetary policy further. With the interest rate curve still pricing in 75bp of easing next year, the central bank’s neutral tone has scared traders from continuing to sell pounds. As we mentioned in yesterday’s Daily Fundamentals, the BoE had good reasons to cut interest rates. Growth is weakening, the housing market is deteriorating and LIBOR rates have increased sharply in recent weeks. Going forward however, inflation is still a big concern which means that if it remains high, the central bank may sit on their hands next month. The minutes from the meeting will be extremely important in determining the timing of the next rate cut. The British pound’s lack of follow through weakness has led some traders to believe that we have seen a spike bottom in the GBP/USD. If that is true, it will be because of US and not UK fundamentals.