British rate cuts appear ‘imminent’

The release of the minutes of last month’s meeting of Britain’s Central Bank revealed a growing minority of members in favor of lowering interest rates.  The official vote was 5-4 in favor of maintaining interest rates at current levels. However, few economists and pundits had reason to believe the vote would be so close. While many traders had already begun to price lower interest rates into bonds prior to last month’s meeting, it seems a rate cut at the next meeting is a near certainty. Recent economic data not only suggests the economy is slowing down, but also that inflation is likely to be lower than expected. As a result, both the members of the Central Bank targeting inflation indices as well as those targeting general economic performance, would seem to have a solid basis for lowering rates. The Financial Times reports:

Sterling had already been on the ropes prior to the MPC announcement…Against this backdrop sterling fell to a 19-month low in trade-weighted terms.

Read More: Sterling falls as BoE votes 5-4 against rate cut

British Central Bank mulls rate cuts

At its last meeting, Britain’s Central Bank voted to leave the national interest rate unchanged at  4.75%. With new data pouring in every day suggesting Britain’s economy is in trouble, the Bank’s leaders may soon rethink their stance on interest rates. Consumer spending, considered by many British economists to be the most important growth driver, is declining. The drop in savings rates and stagnation of home prices indicates consumers have already spent all that can be expected. Moreover, last week’s terrorist attacks will likely cause consumer confidence to fall further, mitigating the possibility of a fast recovery. Economic growth is now projected at 2.1% for 2005, down from 2.75% in 2004. When the Central Bank meets next month, the upshot will most certainly be lower interest rates. Traders and investors concur, and have priced two rate cuts into British debt futures, implying a rate of 4.25% at the year’s end. Rate cuts or not, the British Pound will most likely continue to slide. The Economist reports:

The strong chance of feeble growth in the second quarter—the National Institute of Economic and Social Research is forecasting a rise in GDP of only 0.3%—means that a cut in August is on the cards. In a poll of economists on July 5th by Reuters, 26 out of 43 said that rates would fall next month.

Read More: They’re coming down soon

British Pound falls after terrorist attacks

Forex traders and investors responded to the terrorist attacks which rocked London today by sending the British Pound to near 18-month lows against the USD.  As soon as the news reached the trading floors of forex dealers, panic set in, and the Pound quickly lost 1% of its value, relative to the USD. Experts agree both the attack-and the ensuing panic in the markets-could have been far worse.  One trader spoke of a “risk premium” which has been built into the currencies of nations that are potentially susceptible to terrorism, and probably prevented the Pound from depreciating further. Investors begin to understand the relatively minor implications of this latest attack, the Pound may well recover.  Forbes reports:

“The knee-jerk reaction was quite violent across all markets and the usual safe-haven trades were being put on,” said one currency strategist.  “The market is now backing off a little and questioning the magnitude of the implications.”

Read More: Sterling hits 18-month low against dollar

British Pound may decline as growth flattens

For the last few years, speculators in search of high interest rates have poured ‘hot money’ into Britain, causing the Pound to appreciate.  Now, it seems the Pound may be overvalued, rendering British exports uncompetitive.  A new spate of economic data indicates the British economy is slowing rapidly. In addition, a British housing bubble has begun to deflate, causing a subsequent decline in consumption. As Britain’s Central Bank prepares to lower interest rates, it seems investment will follow the same downward path as consumption. It may take a massive correction of Britain’s exchange rate to stem the decline of its economy. The Times Online reports:

With sterling’s valuation the focus of renewed attention, pressure on the pound will almost certainly intensify as currency markets home in on the increasingly apparent vulnerabilities of Britain’s economy.

Read More: Faltering growth knocks pound’s potency