EYE ON THE UK: BOE’s Road To Zero

The Bank of England cut its benchmark interest rate 50bps today to 1%, as Governor King attempts to transition the UK out of recession. The cut, taking the rate to the lowest since the central bank was founded in 1694, was not reciprocated by Trichet and the ECB, who opted to maintain their benchmark at 2% when it met today.

The UK economy is mired in a multifaceted mess with no relief in sight: credit conditions have continued to tighten despite the bank restructures and nationalization recaps; housing prices continue to collapse —we last reported that January data released by Hometrack registered a decline of -9.4% year-over-year for the average cost of a home in England and Wales; and unemployment is at its highest level in January at 6.1%.

On the balance this cut might help combined with Prime Minister Brown’s £20 Billion package of tax cuts. If the Pound can decline against the Euro (see chart) and Dollar, this could be a short term catalyst for exports (see Korea’s recent uptick in some industries) –provided that corporate Britain can make good on the opportunity. That said, this cut does seem like too little, too late.

We’re currently short the UK via the EWU etf.

Matthew Hedrick
Analyst