The Bank of England Capitulates

If there's one advantage of being a little behind the curve when it comes to rate cuts, it's that you can shock the markets with an absolutely monster out-of-the-blue 150bp cut even as most people were expecting just 50bp. Well done, Bank of England: if you're going to end up cutting that much anyway, there's no reason to be gradualist about it.

But here's a sign of how weird things are these days: the market reaction was basically a big "meh". UK stocks remained down on the day, and the pound, astonishingly, actually rose. Maybe that was because everybody else is cutting rates too, if not quite as much: the ECB and the Swiss National Bank both cut by 50bp today as well.

Another sign of the new world we're living in: UK treasury officials immediately went on television to tell banks that they were expected to pass the rate cut on to their borrowers. Remember that pretty much the first thing Gordon Brown did, when he became Chancellor in 1997, was to make the Bank of England independent. But just as in the US, that independence has perforce eroded during this crisis: in a crisis, all correlations go to 1, and that includes the correlation between fiscal and monetary policy.

UK interest rates, at 3%, are still higher than rates in Europe, the US, and Switzerland, so there's room for further cuts should the Bank of England be so inclined. That's a luxury the Fed, for one, no longer really has -- which is why emphasis now is very much on fiscal, rather than monetary, policy. Bernanke will help out when and as he can, but the ball is very much in Obama's court.