The news that the Bank of England's MPC are keeping the option of reducing the rate of interest banks receive on deposits in a effort to avoid a liquidity trap sent sterling spiraling yesterday. Governor King said that it would be a “useful supplement” to stimulate the ailing UK economy as it has proved to be in Sweden, where this has been in effect for 3 weeks or so. The aim is to raise lending and stop banks hoarding cash.
GBP fell to a 4 month low against the euro with similar dips seen against the dollar, Swiss franc and Japanese Yen as the market quickly lost belief in the pound’s recent rally.
The announcement overshadowed the news that inflation in the UK has fallen to the lowest level since January 2007 although the 1.6% figure was higher than the 1.4% market estimate. This follows are exact thoughts that inflation here in the UK will remain more sticky for a considerable time.
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