Markets fail to respond to shock interest rate announcement
The Bank of England announced its decision on interest rates a day early today following another eventful week on the financial markets.
The Bank of England cut rates by half a percentage point from 5% to 4.5%, the last time this occurred was in September 2001. Rates have remained at 5% since April in a bid to curb inflation.
Co-ordinated action by the world’s major central banks also saw the European Central Bank (ECB) and the US Federal Reserve cut rates by 50 basis points. The ECB cut rates from 4.25% to 3.75%, while the Fed lowered US rates from 2% to 1.5%.
However, the interest rate cuts failed to boost the markets after London’s FTSE 100 closed down 5.18%, France’s Cac 40 was 6.3% lower, while Germany’s Dax lost 5.9%.
It was hoped that the FTSE would respond to the £500 billion package that the UK Government announced earlier today.
£50 billion, at the expense of the taxpayer, will see a part-nationalisation of UK banks, met from increased public borrowing, while banking executives will see their pay and bonuses cut.
Furthermore, the Bank of England will inject at least £200 billion into the money markets under its existing Special Liquidity Scheme.
A further £250 billion will be available to banks over the next three years to guarantee medium-term debt to help restore confidence in the hopes that banks will lend to each other again.
Banks and building societies that have confirmed will take part in the plan are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.
In related news, figures from the British Retail Consortium (BRC) show that the increase in shop prices stabilised last month, suggested that inflation may have reached its peak.
The BRC said the annual rate of shop price inflation is 3.6%, down from 3.8% in August.