British Pound weakens as Bank of England is Forced into Action

Growing evidence that the Bank of England may eventually need to ease monetary policy has pushed the British pound lower against both the Euro and the US dollar. In fact the pound has been driven to the weakest level against the Euro since May 2006.

Although Northern Rock tipped the otherwise steady boat, we learned this morning that the Bank of England was already cautious about the economic and inflation outlook at the beginning of this month. Northern Rock will only make them even more concerned. Consumer prices last month dropped only modestly, but the BoE who may or may not have had this information on September 5th felt that the upside balance of risk to inflation has receded. Coupled with the $4.4 billion liquidation injection yesterday and the announcement that UK banks will be allowed to borrow from the BoE using mortgages as collateral, raises the risk of a surprise interest rate cut. The BoE has always been a very dynamic central bank that pays close attention to the changes in economic data. Therefore should the financial markets in the UK fail to stabilize or there is a run on another bank, they will not be hesitant to lower interest rates.

Written by Kathy Lien, Chief Currency Strategist of