British Pound Falters As BOE Bails Out Northern Rock

The British pound tumbled on Friday after the Bank of England announced plans to provide liquidity to the UK’s fourth largest mortgage lend, Northern Rock, which was finding it increasingly difficult to access longer term funding.

While the BOE’s press release specifically said that that they judged “Northern Rock to be solvent, as it exceeds its regulatory capital requirement and has a good quality loan book," currency traders took off running on speculation that the company will get caught in the classic “borrow short, lend long” squeeze. Furthermore, news reports indicated an all out run on the bank, as thousands of Northern Rock customers lined up to withdraw their savings from the bank. Even if the current situation in the UK is resolved with a minimal loss of capital, this news indicates that the economy clearly has some severe stress fractures. Moreover, the country’s previously booming housing sector could be ready to take a dive in a similar fashion to that of the US housing sector. As a result, the BOE will be forced to take a far more cautious policy path, and the bank’s monetary policy cycle has likely come to an end with a hike to 6.00 percent before year end effectively off the table.

Written by Terri Belkas, Currency Analyst of