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European rate cuts are good news



November 06, 2008 – Comments (2)

The best part about this piece of news is this absolutely stunning picture of London's financial district.  That alone makes this blog post worth a rec ;).

The big economic news today is that in an unprecedented move, the Bank of England cut in interest rates by a point and a half this morning. No wonder the Pound has been getting pounded lately. And we thought that the 75 basis point cuts by the Fed were aggressive. England's benchmark interest rate is now 3.0%, much higher than the 1.0% that we have here in the U.S.

To give some perspective, this is the first time that the B of E has cut rates by more than 50 basis points since becoming independent in 1997 and is its largest rate cut since March of 1981. England's benchmark rate has not been this low since 1955.

In similar news, the European Central Bank announced this morning that it is cutting rates by a substantial, but less aggressive 50 basis points.

From the perspective of someone in the U.S. these moves have to be considered good news. Sure it means that the European economies are in bad shape, but even if the rate cuts don't help as much as they have in past recessions they will at least help some. Theoretically the cheap money will stimulate demand and encourage lending.

Bank of England slashes interest rate by a point and a half

ECB Cuts Interest Rate by Half Point to Counter Economic Slump


2 Comments – Post Your Own

#1) On November 06, 2008 at 10:15 AM, EPS100Momentum (73.25) wrote:

Those extreme rate cuts in Europe is really bad news for OIL & oil stocks.

 Forget Oil & Energy Sector earnings,   their forecast will keep falling

Oil & gas have no support in the $60's

England lowering rates by 1 1/2% & ECB lowering rates is really bad for oil spot price because a stronger dollar makes for a lower oil price.

ETF DIG will keep falling invests in oil & gas, DUG will go up as it shorts Oil & Gas


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#2) On November 06, 2008 at 10:45 AM, TMFDeej (97.76) wrote:

Good point EPS.  These cuts are definitely bearish for the Euro and the Pound, and in turn oil which is priced in U.S. dollars in the short run, but in the long run whatever gets the economy back on track and stimulates demand for oil is ultimately bullish for it.

When one looks past all of the currency gyrations, the price of oil always boils down to supply and demand.  Low oil prices are choking off new projects and causing OPEC to cut production, and shockingly it appears at least for now it looks like OPEC is backing up its words with real actions.  Over the next year, these things should soak up a lot of the excess supply. 

On the demand side, if aggressive global rate cuts help the recession end more quickly they will ultimately prop up demand and in the long run they will be bullish for oil.

I expect oil to continue to fall in the short run and bounce back some time in 2009.


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