Trader’s Narrative

As I mentioned a few days ago, my gut instinct tells me that the major central banks are about to turn and enter into an easing cycle. The Australian monetary authority and their European counterparts stayed pat but the British had a surprise in store for the markets today.

Bank of England’s “Surprise” Cut
Today, the BoE reduced the bank rate by 25 basis points to 5.5% - at which, it is still the highest rate in Europe. According to Bloomberg, the vast majority of economists were not predicting the reduction.

This is the Bank’s first cut in more than 2 years and brings the rate down from a 6 year high. Most are now expecting that this will be accompanied by further cuts in the near future.

Similar to the Bank of Canada, the decision was spurred on by concern of an expanding credit crisis brought about by the sub-prime mortgage crisis in the US. An excerpt from their statement:

Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow… conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

According to HBOS plc, the UK’s largest mortgage and savings provider, house prices fell for a 3rd month in November by 1.1%. That’s the worst streak for property values since 1995.

European Central Bank Stands Aside
Citing an unexpected rise in inflation, the ECB decided to hold rates steady at 4%. If inflation hadn’t come in at 3% - a full percentage point above their target - I’m think they would also have reduced rates.

Unlike the Bank of England’s decision most economists and analysts expected the rate decision, so no surprise.