Good morning. The UK economy has something to cheer about after some time. That’s because the Bank of England and Governor Mervyn King decided yesterday that they have seen enough, and decided to fire their bazooka with a £75 billion shell. After the two-day policy meeting, the BoE approved increasing its money supply by £75 billion to £275 billion over the next four months. “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever,” said Mr. King to Sky News later in an interview.
“We’re having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy,” he added. Well, he had obvious reasons for doing so. With the funding market drying up and banks unwilling to lend even other banks, let alone businesses and consumers, there is indeed a serious liquidity issue currently sweeping the British economy. To complicate matters further, there’s no definitive action emerging from the European Union to tackle the Greece crisis. EU being UK’s biggest trading partner, the crisis has put it on tenterhooks as well.
Finance Minister George Osborne authorised the resumption of the emergency monetary easing exercise. “Further asset purchases provide the MPC with the appropriate tool with which to address the deterioration in economic conditions, particularly in view of the tensions in the world economy that threatens the UK recovery,” Mr. Osborne wrote in the official letter to Mervyn King.
“I am therefore writing to authorise an increase in the ceiling of asset purchases financed by the issuance of central bank reserves from £200 billion to up to £275 billion,” he added.
The MPC meeting also decided to keep the interest rate unchanged at 0.5%. This double booster should help the economy gain some pace and hopefully the consumer confidence will get a little boost. However, the Sterling is expected to weaken further in near-term.
However, the UK banking industry received a bitter dose of reality after rating’s agency Moody’s downgraded 12 UK banks and credit societies. Lloyds TSB, Santander UK and Co-Operative suffered one notch downgrade while RBS and Nationwide Building Society fell by two notches. 7 other building societies suffered up-to five-notch downgrade. Moody’s cited gradual withdrawal of government support as the reason.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1540
GBP/US$ – 1.5520
GBP/CHF – 1.4280
GBP/CAN$ – 1.6134
GBP/AUS$ – 1.5834
GBP/ZAR – 12.3315
GBP/JPY – 110.02
GBP/HKD – 12.0880
GBP/NZD – 2.0042
GBP/SEK – 10.5610
EURO: The single currency held onto its marginal overnight gains yesterday as the European Central Bank announced new lending measures for the region’s banks well into next year. The US jobs data are out today, and analysts’ consensus says 55K jobs added last month. The EURO/USD pair opens at 1.3444 this morning. The GBP/EUR pair opens at 1.1540 today morning.
USD: The Cable fell by 220 pips against the greenback yesterday to 1.5280 after BoE’s QE announcement. However, investors remain cautious ahead of today’s US non-farm release. The GBP/USD pair recovered today morning and opened at 1.5527.
Elsewhere, the AUD and NZD gained against the greenback as risk sentiment improves. AUD/USD and NZD/USD pairs open at 0.9775 and 0.7720 respectively today morning.
Have a great day.
