The BOE’s 150 basis point cut today, took the benchmark rate to its lowest level since Winston Churchill’s second term as Prime Minister. We attached a long-term chart of Rates and GDP growth below to put the present situation in context.
Mervyn King is not the only central banker pumping liquidity into the system today – both Switzerland (which we are long via EWL) and the EU cut rates today by 50 basis points each, but he does appear to be the most desperate. The British economy has been reeling under the weight of worsening data: HBOS housing numbers declined by almost -15% year over year, the worst performance since 1983, while yesterday’s industrial production numbers confirmed that manufacturing contracted in August, adding to the longest losing streak since 1992.
In a theme which is echoed in other markets where lawmakers have rushed to bail out failing banks, Gordon Brown’s administration is exerting increasing pressure on banks who participated in the government recapitalization program to begin actively lending again and pass lower rates through to borrowers rather than hoarding capital.
We continue to be short the UK via the EWU ETF. As one of the more levered and poorly managed economies in Europe we anticipate relative weakness there for the seeable future.