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ECB and BoE: Thursday Morning Rate Cuts!

Thu, Nov 6 2008, 14:39 GMT
by Kathy Lien

GFT

It is the morning for rate cuts with the European Central Bank, Bank of England and the Swiss National Bank all cutting interest rates. On a day when the Bank of England shocked the markets with a 150bp rate cut, the ECB and the SNB's half point cut seemed very small in comparison.

Every major central bank is worried about growth but not as worried as the ECB. Unlike King who openly admitted that the economy is in a recession, when asked the same question, Trichet simply said "we will see." On future rate cuts, he said that the ECB never pre-commits . If Trichet was serious about cutting interest rates aggressively, he would not be qualifying his comments on inflation and future rate cuts.

In his post meeting press conference, ECB President Trichet was not as bearish as he could have been given the sharp deterioration in growth.

He spent the majority of his time discussing inflation and how it is set to ease but skirted over growth and the economic outlook. Larger rate cuts was discussed but the decision to cut by 50bp to 3.25% was unanimous. Compared to the BoE, the ECB's tone is less dovish.

The ECB is a much more conservative central bank and it is clear that their monetary policies are more restrictive. They have only cut rates by 75bp this year when taking into account their rate hike in July.

More rate cuts will come from the ECB, but Trichet’s comment about not pre-committing to rate cuts indicates that they will not be making rate cuts in excess of 100bp like the BoE. Trichet feels that he has already done a lot by cutting interest rates twice in 1 month. The sharp divergence in the actions taken by the ECB and the BoE today should help the Euro recover against the British pound.

Mervyn King Rises to the Task

It is almost as if there is a new man in town at the BoE. Yesterday, I argued that the BoE could cut by 100bp and they even blew away that outside expectation. Earlier this year, Mervyn King was still being criticized for being behind the curve. A month ago, he shed that image by announcing plans to take equity stakes in banks. King realizes that he has a seismic challenge ahead of him and today's move confirms that the economy is in a recession. This has compelled the BoE to take an insurance out on future growth by making a much larger than expected rate cut. UK interest rates are now at 3.00%, the lowest in 55 years! He is sending a strong message to the markets that they can trust him to proactively deal with the credit and financial crisis.

Why Did the GBP Rally?

Interestingly enough, even though the British pound collapsed following the rate decision, it recovered dramatically in the minutes following the release. With every major central bank taking interest rates towards zero to 1 percent, the BoE's move today restored confidence in the UK monetary policy committee. They have delivered a significant stimulus to the UK economy and the currency market is happy with it. We would not rule out further rate cuts by the Bank of England, but certainly not by the same degree that we have seen today.

Swiss National Bank

Lost in the fanfare of the BoE and ECB rate cuts today, was the 50bp rate cut by the Swiss National Bank. The target range for interest rates is now 1.5 to 2.5 percent. The central bank is concerned about growth and suggested that it may even be negative next year. This tells us that they are also looking forward to further rate cuts.

Published on  Thu, Nov 6 2008, 14:41 GMT

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