UK Cuts Interest Rates

The Bank of England is following the path laid by the U.S. Fed.

UK interest rates trimmed to 5.5%

The Bank of England has cut UK interest rates to 5.5% from 5.75% amid signs that the economy is slowing.

Expectations of a rate cut had risen in recent days after figures indicated that economic conditions had deteriorated over the past few weeks.

As is almost always the case, monetary policy choices boil down to you can try to avoid a recession or try to slow inflation. Much like the Federal Reserve Board, the Bank of England has chosen to avoid recession and will worry about inflation later.

BBC economics editor Evan Davis said that Thursday's rate cut was aimed at making sure the economy did not slow too quickly.

"It is about making sure that the slowdown, which seems to be happening, does not get out of control," he explained.

Amazingly enough for the BBC, they did not blame Bush for the UK economic slowdown in this article.

I also look for the Fed to do another 0.25% to 0.50% cut shortly.

Wall Street Buzzing Over Rate Cut

Wall Street is abuzz with anticipation of Fed action later today. The only debate is will the Fed cut the discount rate by 25 basis points or 50?

25 or 50? Bernanke's Fed faces a key test

Most economists think the central bank will cut by a quarter-percentage point to 5.0%, but some are attracted to the somewhat strong move of a half-percentage point.

"While the arguments favoring a bold move are compelling, we believe the chances of a 25 basis point cut carry a higher probability," said Michael Moran, chief economist at Daiwa Securities America Inc., in a note to clients.

The Fed's are not exactly what you would call bold decision makers. Therefore, I say they will cut the discount rate 25 basis points while also quietly expanding the money supply via open market operations (which most of the public does not understand), and then they will sit back and see how things go.

Regardless of all the analysis and computer modeling they do, the Fed's will almost always just tweak rates by 25 basis points at a time and then see what happens.

By the way, this also presents a tasty profit opportunity out there for anybody who knows how to set themselves up correctly to take advantage of a rate cut.

Bank of England Raises Key Rate

It looks like inflation continues to heat up in England.

Bank of England raises key rate to 5.75%: U.K. rates hit six-year high; further hike may be on the cards

The Bank of England elected to raise interest rates for the fifth time in under a year Thursday, with rates hitting a six-year high as the bank continues to fight above-target inflation.

The central bank's Monetary Policy Committee hiked its key rate by a quarter-point to 5.75%, in line with the forecast of most economists. The move followed a tight vote at the committee's last meeting in June, which saw Governor Mervyn King's call to raise rates defeated in a five-to-four vote.

This now raises the English discount rate to 0.50% higher than the US rate. Look for the dollar to depreciate relative to the pound. That will make U.S. goods relatively cheaper to buy and thus improve the U.S. export/import picture.

I'd keep a close eye on this situation. Five increases in less than 12 months is the equivalent of locking up your brakes on the expressway. The Bank of England must be pretty spooked about the core inflation numbers and productivity numbers they are seeing.