BoE moves closer towards ZIRP

The Bank of England took another step towards zero rates on Thursday. Times Online reports:

The Bank of England pushed deeper into uncharted territory yesterday in its fight against deepening recession, cutting interest rates to 1 per cent – the lowest in its 314-year history. The move to reduce rates by another half-point was the fifth cut in five months that have marked a fall from 5 per cent...

Explaining its decision to reduce rates again, the Bank painted a bleak picture of the state of the economy, which, official figures say, shrank by 1.5 per cent in the previous quarter.

The Bank said that it now expected a similar slump in national income in the present quarter, with the world in the throes of what it called a “severe and synchronised downturn”.

Confidence among households and businesses was sinking, while companies and families faced a continued credit drought, it added. As a result, it said, consumer spending was weak while businesses were slashing jobs and drastically cutting investment.

Ironically enough, the day also brought positive data on the UK economy.

As fearful consumers retreat from the high street and homeowners fret over plunging property values, there was some respite from the deluge of bad news yesterday as Halifax, the nation’s biggest mortgage lender, reported that house prices ticked upwards last month.

House prices rose by 1.9 per cent in January as bargain hunters snapped up cheap properties. However, prices are still 17 per cent lower than January last year.

In contrast, the data out of Germany remained negative on Thursday. From Bloomberg:

Manufacturing orders in Germany, Europe’s largest economy, dropped more than economists expected in December, extending the worst decline on record.

Orders, adjusted for seasonal swings and inflation, fell 6.9 percent from November, the Economy Ministry in Berlin said today. That’s adding to the biggest slump since data for a reunified Germany was first compiled in 1991...

From a year earlier, orders slumped 25.1 percent...

But the deterioration in the economy in Germany and elsewhere in the eurozone did not move the ECB to cut rates on Thursday. From Bloomberg:

The European Central Bank kept interest rates unchanged after four reductions since early October as officials gauge the severity of the recession before cutting borrowing costs again.

Policy makers meeting in Frankfurt left the benchmark lending rate at 2 percent...

Nevertheless, central bank rates are clearly on the downtrend. From another Bloomberg report on Thursday:

European Central Bank President Jean- Claude Trichet signaled policy makers may cut their benchmark interest rate by half a percentage point to a record low of 1.5 percent next month as a recession in the euro region deepens.

“I don’t exclude that we could reduce interest rates at our next decision,” Trichet said at a press conference in Frankfurt after leaving the key rate at 2 percent today...

Central banks in South Africa and the Czech Republic joined the U.K. in cutting interest rates today to fight the global slump. South Africa’s central bank cut its benchmark rate by 1 percentage point, the biggest reduction in more than five years, to 10.5 percent. The Czech central bank lowered the key rate for the third consecutive time, by half a point to 1.75 percent.

There is practically no more room for rate cuts in the US though, even as the economy continues to head south. From Bloomberg:

Initial applications for unemployment benefits climbed more than forecast to 626,000 last week, a Labor Department report showed today in Washington. Productivity, a measure of employee output per hour, rose at a 3.2 percent annual rate in October to December as employers cut 1.5 million from payrolls and slashed working hours by the most since 1975, the department said...

A separate Commerce Department report today showed that orders placed with U.S. factories fell for a fifth month in December as domestic and international demand crumbled. Bookings tumbled 3.9 percent, more than forecast, after a 6.5 percent drop in November. Excluding transportation equipment such as cars and aircraft, orders fell 4.4 percent after a 6 percent decrease.