After one of the most hotly debated rate decisions in recent times, the Bank of England delivered its largest interest rate cut in 15 years today, slashing the UK base rate by a full 1.50% to 3.00%, in an effort to shield the ailing British economy from the fallout of the global credit crisis. The move follows on from last month’s coordinated 0.50% cut with other major Central Banks, as the credit crisis increased its stranglehold on the global economy.
Faced with mounting evidence that the UK economy is headed for recession, the Monetary Policy Committee has come under increased pressure to take more decisive action. Earlier this week Britain’s service sector, the backbone of the UK economy, was seen contracting at its sharpest rate on record while factory output posted its longest decline since the 1980’s recession, heralding further job losses. However, the most influential of recent developments was the sharp contraction in third quarter GDP, confirming the UK economy is on the brink of a recession, sharply reducing consumer and business confidence for the coming year.
Recent comments by Governor Mervyn King stating that “it now seems likely that the UK economy is entering a recession” signals further monetary easing is in the pipeline.
Major Interest Rates
Major Interest Rates
US Fed Fund Rate 1.00% 29th Oct 2008
EU Min. Bid Rate 3.75% 8th Oct 2008
UK Base Rate 3.00% 6th Nov 2008
Source: HIFX Financial Services Ltd
Shares in Lehman Brothers continued their steep decline on Tuesday, falling more than 13 per cent amid fresh predictions of significant third-quarter writedowns.
The decline also came after reports that the troubled investment bank may sell all or part of its asset management arm, Neuberger Berman, a move it has long resisted.
Lehman shares dropped 13.04 per cent, or $1.96, to close at $13.07 in New York, reducing the market value of the investment bank to around $9.1bn. That is less than the estimated $10bn standalone value of Neuberger, which Lehman bought for $2.6bn in 2003.
Lehman shares are off nearly 80 per cent this year following large writedowns on the bank’s troubled mortgage portfolios. Lehman was among the leading underwriters of mortgage-backed securities and was left with large holdings after the subprime crisis curtailed investor appetite for the fixed-income products.
Tuesday’s share price drop came after analysts at JPMorgan Chase said in a report that Lehman would post another $4bn in credit-related writedowns in its fiscal third quarter, which closes at the end of August.
Lehman has already posted over $8bn in writedowns and has been scrambling to raise capital to shore up its balance sheet. Lehman declined to comment on the JPMorgan report. Lehman has been selling some mortgage assets but still has about $61bn in exposure, JPMorgan said.
Lehman raised $6bn in the spring from a group of mostly US-based institutional investors following an embarrassing $2.8bn second-quarter loss, the first in its 14-year history as a public company.
Lehman had hoped to make a deal with a strategic Asian partner as part of the capital raising but talks failed to progress. Investors in the last capital-raising are sitting on significant losses so it is not likely that Lehman could sell more shares to raise fresh capital.
People close to the matter said Monday that Lehman was involved in exploratory talks with several private equity and strategic bidders for all or part of Neuberger Berman.
However, the JPMorgan analysts said they did not believe the business would be sold because it is a reliable cash generator.