Thursday, November 6, 2008

Cutting the Interest Rate in England Won't Work

The Bank of England (BOE) took the unusual step of cutting it's interest rate by 1.5% (150 basis points) to 3.0%. The measure sent many in the European financial world into a coma since the BOE's normal modus operandi is to be conservative and reactive when making changes to its interest rates. I do have one question for the "Old Lady of Threadneedle Street". Haven't we seen this economic strategy before? Do the words "Federal Reserve" mean anything you? No, well how about "Bernanke" or "Greenspan". What have you been doing the past two years, watching the tele?

Martin Weale from the National Institute of Economic and Social Research comments on the BOE cutting its lending rate:







I understand that the BOE is trying to be proactive in reversing the downturn in the UK economy, but slashing interest rates will lead the British markets into the same complications that plaques the US - which is overextended or undocumented mortgages. Considering that European Central Bank cut its lending rate a half of a percentage point to 3.25% and the Swiss National Bank cut its target band to 1.5% - 2.5% range the BOE should "slow its roll" just a little bit.

The International Monetary Fund revised its earlier growth forecast projecting the economies of the United States, Europe and Japan will contract 0.3% in 2009. Considering the actions of the BOE this week, no wonder IMF changed its mind.

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