Rate cut adds pressure to sterling sparking traders to sell

As widely expected, the Bank of England has today announced a 0.25% interest rate cut, lowering the base rate to 5.25%.

Although today’s cut had already been priced into the market, currency specialists HiFX highlight that Sterling could devalue further if the MPC indicate that further cuts are likely in the months ahead.

Chris Towner, Currency Strategist at HiFX explains: “Today’s rate cut came as little surprise to the market following the recent downturn in the global economy. With the Fed leading the way by cutting US interest rates by 1.25% in the past fortnight, speculation that the MPC might follow in their footsteps has been rife. Currency markets and interest rates have broadly correlated in recent years and if the committee signal that more rate cuts are likely in 2008, this could further weigh on the Pound.”

Yesterday Sterling hit its lowest point in two weeks versus the dollar and was down against the Euro, which has been relatively strong as the European Central Bank are expected to keep rates on hold at 4% today.

Towner continues: “In light of falling house prices, various signs of slowing economic growth and waning consumer confidence, the MPC have taken this action to shore up growth prospects. However, business activity is clearly not collapsing; as service sector growth proved earlier this week. We also have to bear in mind, that while house prices in the UK are significantly cooling, they are not plummeting to the extent that we have seen in the US. Unless the UK economy begins to show signs of rapid deterioration, we are unlikely to see really aggressive rate cutting tactics in like those used by the Federal Reserve.

“As always, the market will look towards any accompanying statement followed by the release of the minutes from today’s meeting to gauge how serious policymakers regard recent inflationary pressures and whether or not there is scope for further monetary easing.”