Bank of England U Turn

In what amounted to a dramatic change in policy, the BoE yesterday announced that it was to auction in excess of £10bn three month money. This immediately brought deposit rates down and helped the FTSE rally up 2.8%.

The BoE had previously stood out amongst central banks by refusing to intervene and inject funds into the market to ease the liquidity problems. However, some are already saying that this is too little too late with the damage already done…

The pressure was mounting on the BoE to act after the Fed cut rates on Tuesday by 50bpts and inter-bank rates still remained inflated. These actions came on the day that the August MPC meeting minutes were announced which showed that a unanimous vote kept rates on hold last month.

Many now are forming the opinion that a rate cut next month may be on the cards, and at the very least we have hit the peak of interest rates for the time being.

CPI came in slightly softer than expected at 1.8% this week. Inflation appears under control after two consecutive months of being on target. Also the Fed appears to be shifting its focus from inflationary pressures to the economy at large, easing lending pressures on institutions and home owners.

This begs the question will the BoE follow suit and cut rates next month, something that until recently seemed extremely remote?

Clearly these are uncertain times that have tested the markets, central bankers and their policies. Predicting the next move is not going to be easy. A recent poll by Reuters asked 60 market experts to predict where they expect cable would be in 1 month out to 12 months, the ranges are quite surprising.

The average guess for the 1 month was 2.0110, the minimum 1.9570 and the maximum of 2.0600. The 12 month expectations were even wider in their scope. The mean was 1.9450, the minimum 1.7900 and the maximum 2.1200.

Clearly then even the so called experts can’t agree, illustrating the volatility and unpredictability of the forex markets. Certainty is now the commodity of the day and the desired goal of all risk managers with the employment of more sophisticated solutions.

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