BoE, ECB Lower Rates; UK Home Prices Fall

123jump.com Staff
05 Mar, 2009
New York City

European averages fell sharply after the Bank of England and ECB cut key rates to a record low. The BoE prepared to print money, a highly inflationary step that may hamper the economic growth in the longer term. Investors were also shaken by news that UK house prices fell further in February.

[R]1:00PM New York, 6:00PM London- Bank of England lowers its key rate to 0.5% and is ready to print money and purchase asset to add liquidity to the system.[/R]

London market averages fell markedly after the Bank of England cut its key rate to a record low and prepared to print money, a highly inflationary step that may hamper the economic growth in the longer term.

Though inflation is subdued and liquidity remains tight, central bank action in the longer term is expected raise inflation curve. The central bank has exhausted all available tools and has finally resorted to printing money. The bank hopes that adding liquidity to the system will create or expand credit that will sustain economic growth.

Investors were also shaken by news that house prices fell in February.

In London trading FTSE 100 index fell 2.3% or 116.01 to 3,529.86.

Of the FTSE 100 index stocks, 15 gained, 85 dropped, and 2 were unchanged. British Land Co. led gainers in the index shares with a rise of 4.8% followed by an increase of 4.4% in Hammerson.

BoE Cuts Rate to 0.5%, ECB Lowers to 1.5%

Bank of England lowered its key lending rate by 0.5% to 0.5% as credit markets remain frozen and spread between the benchmark Libor and central bank rate remains at elevated level. The rate cut was accompanied by the bank’s pledge to print money to purchase debt assets of as much as £150 billion in the next three months.

The report notes that there is substantial risk that the country’s inflation might fall below the target 2% in the second half of the year due to reduced contribution of food and energy prices.

Some of the finance will be deployed to the central bank’s private sector asset purchases through the Asset Purchase Facility to improve the functioning of corporate credit markets, while the bank will also buy medium- and long-maturity conventional gilts in the secondary market.

Minutes of today’s meeting will be published on Wednesday, March 18.

On the European continent, ECB lowered its key lending rate to 1.5% and offered to do more if liquidity remains tight. The more hawkish stand of the central bank has bolstered the euro against pound and the U.S. dollar, but with the recent willingness of the bank to cut the rate weaken euro in the near term.

U.K. House Prices Fall 2.3% in February

Lloyds Banking Group reported today in the Halifax House Price Index that the country’s house prices fell 2.3% from a month ago and 17.7% from a year ago to £160,327.

Prices in the quarter to February fell 3.6% from the previous three months.

The house price to average earnings ratio has declined 24% from a peak of 5.84 in July 2007 to an estimated 4.42 in February 2009.

Housing economist Martin Ellis says conditions in the housing market are further expected to continue to be tough on continued pressures on incomes, rising unemployment and difficulties in accessing mortgage finance.

Gainers & Losers

British Land Co. led gainers in the FTSE 100 index shares with a rise of 4.8% followed by increases in Hammerson Plc of 4.4%, in Scottish & South of 3.4%, in Inmarsat Plc of 2.3%, and Sainsbury of 2.2%.

Aviva Plc led decliners in the FTSE 100 index shares with a fall of 33.4% followed by losses in Legal & General Group of 28.9%, in Barclays Plc of 24%, in Prudential Plc of 20%, and Lloyds Banking of 15.5%.

Financial stocks fell on fears over the health of the global economy. Royal Bank of Scotland dipped 8.4% and HSBC shed 5.9%.

Europe Markets Review

In London FTSE 100 Index closed lower 116.01 or 3.18% to 3,529.86, in Paris CAC 40 Index decreased 106.05 or 3.96% to close at 2,569.63 and in Frankfurt DAX index lower 195.45 or 5.02% to close at 3,695.49. In Zurich trading SMI decreased 73.49 or 1.65% to close at 4,390.18.