What next for sterling as Bank of England cut rates by 1.5%?

Marc Cogliatti, Currency Strategist at HiFX comments, "After one of the most hotly debated rate decisions in recent times, the Bank of England delivered its largest interest rate cut in 15 years today, slashing the UK base rate by a full 1.50% to 3.00%, in an effort to shield the ailing British economy from the fallout of the global credit crisis.

The move follows on from last month's coordinated 0.50% cut with other major Central Banks, as the credit crisis increased its stranglehold on the global economy.

"In normal circumstances, a currency would suffer if the Central Bank cut interest rates as it makes that currency less attractive to institutional investors searching for yield. However, in the current environment, this correlation has broken down and Central Banks who do not cut interest rates are seeing their currencies punished on the assumption that it will take longer for their economy to recover. Today has provided us with a great example of this. Prior to the announcement, GBP/USD was trading at 1.5850. The initial reaction saw Sterling sold all the way down close to 1.57, however, it proved short lived and indeed we witnessed a recovery back above 1.60 shortly afterwards. The news may well continue to offer support to Sterling in the near term as investors reward Sterling for the proactive stance showed by the Bank of England."

"The European Central Bank also cut rates but conformed to market expectations and only cut by 0.5% to 3.25%. Nevertheless, it does leave us in the situation where UK interest rates are below that of Europe for the time ever. If anything, the impact on the Euro was marginally negative, although it will be very interesting to see how the market digests today's news as we head into the end of the week."