European Central Bank
The ECB is widely expected to order a further reduction in official eurozone interest rates by a quarter point to 1.0% when its Governing Council meets on Thursday. It is also tipped to embark on unconventional monetary policy moves, taking its lead from the Bank of England and the Federal Reserve with so-called quantitative easing.
UK in ‘V’ Shaped Recession
According to the Treasury officials, UK is now in a ‘V’ shaped recession. The market downturn is very steep and no one knows exactly where the bottom will be.
With the economic output plunging 1.6% in the final months in 2008 and much the same rate in the first quarter this year, all sources of revenue have been decimated by the downturn.
The banking crisis and the assault on bonuses have devastated earnings from the City, while the housing slump has virtually wiped out stamp duty revenues along with the tax income from commercial property transactions. Income tax and VAT receipts have been slaughtered while the Government is facing great pressure caused by a huge rise in unemployment benefit and welfare bills. The 25% devaluation of the pound against other currencies, which would normally have helped a recovery, are having limited advantage now due to the global economic slump.
The measures have already been taken. The VAT was cut and the £75bn are printed by the Bank of England through ‘quantitative easing‘. They are expected to provide some impetus.
Bank of England’s Credit Scheme
This afternoon, the Bank of England and the Treasury officially fired the starting gun on a £50 billion scheme, which is aimed at boosting the flow of credit in the economy.
It has been confirmed that next week, Bank of England will set out the framework in which its planned Asset Purchase Facility will operate. These news follow last week’s fresh package of proposals which is aimed at reviving economic activity and taking UK closer to effectively printing money. The policy is very similar to the ones undertaken by the Federal Reserve of US and the Bank of Japan in the last few months.
An immediate rise in gilt yields was sparked the news, with two-year yields rising by 3.3 basis points to 1.51%, five-year yields by 5.3 basis points to 2.887% and 10-year yields by 8.5 basis points to 3.729%.
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