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Bank of England Cuts 50bp Will Use 75B GBP To Buy Assets

Last updated 3/5/2009 7:35 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

In a move that surprised no one Bank of England cuts rates by another 50bp to 0.5%. Additionally,  in a first detailed communication to the market as to how it intends to pursue quantitative easing  to help stimulate the moribund UK economy,   the central bank   announced that it will purchase up 75 Billion GBP of securities  by using its own reserves.

With UK interest rates now only 50bp away from zero, any further attempts at rate cuts have clearly lost much of their stimulative impact.  The BoE therefore has become the first of the Western G7 central banks to officially turn to quantitative easing as a new tool to help jumpstart the economy.  

Cable sold off in a knee jerk reaction to the news, dropping below 1.4100level as traders worried about the dilutive nature of the new policy initiate. However, it is believed that the BoE purchase program will focus primarily on sovereign debt and will therefore assume relatively little credit risk.

GBP/USD has held the 1.3950 level three times this week and should the pair repel the latest assault of the shorts,  pound could set up for a rally if the currency market starts to believe that BoE aggressive moves will help stabilize the UK economy and help to revive demand.  With most of the G7 universe moving inexorably towards ZIRP,  currency valuation in 2009 will no longer depend on yields but rather growth.  If BoE policies,  prove successful, the UK economy may be the first to rebound lifting the pound along the way.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.