Currencies Direct: Interest rates slashed to prevent recession

STIMULUS IN THE UK: The Bank of England cut interest rates to new lows and unveiled a raft of stimulus measures that include resuming a bond-buying stimulus program to pump money into the economy and launching a program of cheap lending to banks.

Sterling gained 0.3 percent to $1.3144 and 0.2 percent against the euro to 84.73 pence.

In London, the FTSE 100 gained 1.59% to end the day at 6,740.16.

This included an increase to the Bank’s money printing programme and a new funding scheme for banks to help offset the pressure of lower interest rates on their margins.

The declines in yields was “probably on speculation that the deterioration in the pound could well see policymakers at the (European Central Bank) and the Federal Reserve push back on the appreciation of their currencies as the race for a competitive currency continues”, Michael Hewson, chief market analyst at CMC Markets in London, wrote in a note. The measures seemed to exceed investors’ expectations, and the bank said the measures could be expanded later if it proves necessary.

Investors are counting on the Bank of England to cut interest rates to a record low 0.25 percent later on Thursday to support an economy that has slumped since the Brexit vote.

The pound fell against both the dollar and the euro while rates of return on British government bonds sagged.

Warning that the decision to leave the European Union in June’s referendum would stoke inflation and push up unemployment, the Bank’s monetary policy committee unveiled a four-point plan to mitigate the impact.

The Bank kept its growth forecast at 2% for 2016, thanks only to a better than expected first half, but it sharply reduced the outlook to 0.8% in 2017 and 1.8% in 2018.

“Monetary policy can’t do much more on its own”, she said.

“The bank’s further loosening of monetary policy could prove problematic for the United Kingdom economy”.

The central bank acted after slashing its growth forecast by the biggest margin in almost 20 years.

There will also be a new £100 billion funding program for banks created to prevent their profit margins being squeezed still further by record low interest rates.

Spot gold was up 0.3 per cent at $US1,361.14 an ounce by 3:00 p.m. EDT (0500 AEST), off an earlier low of $US1,348.50, while USA gold futures for December delivery settled up 0.2 per cent at $US1,367.40.

Finance Minister Philip Hammond welcomed the rate cut and said he and Carney had “the tools we need to support the economy as we begin this new chapter and address the challenges ahead”. “Even though lower interest rates may give a helpful boost to market confidence what businesses really want is low, stable interest rates for the foreseeable future, which will enable them to make their own growth and expansion plans with confidence”.

But on the other hand, savings rate are set to move lower making it even harder to get a return on cash.

Although the rate cut was expected, the additional stimulus measures surprised the market. It’s on track for a 0.4 percent gain for the week.