Improved UK Markets?
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The Bank of England reduced interest rates again in early February. Whilst the Bank did what the market expected there is now a large contingent who believe that more cuts and any move lower towards 0% interest rates will be a huge over reaction by the UK’s central bank.
So far in their relatively sort lived life time as an independent bank they have not exactly covered themselves in glory. Only a year ago the UK base rate was still over 5% and the major concern for the MPC was inflation.
The circumstances have changed at such an alarming pace in the last 12 months that it has even led to rate cuts being made outside the normal meetings in order to get the banking system functioning properly again. We should just about start to see the action of the big cuts back in October and November but we’re still a few months off from seeing the full effect.
However, as the pessimists of these rate cuts point out they benefit the few and punish the many with those lucky enough to have tracker mortgages being the only people better off. The ever increasing number of retired, who rely on income from savings and annuities, will be worse off.
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As Simon Denham of Financial Spreads recently said, “The problem still lies in the banks being able to function as banks. What the Bank of England is doing is preventing Banks from charging for their money. Whilst the consumer is struggling both from a back log of debt and now many without a job, the banks cannot just give away their money. Rate cuts are one thing, but what will really assist the economy is the flow of credit”.
On the plus side there are already some slightly more optimistic views about the recovery filtering into the press and amongst economists in the City. The use of this “R” word comes with a huge note of caution, as we are not seeing a “R” yet.
The rise in UK house prices for January came as a surprise and whilst it does not mean the trend downwards is over it is possibly an indication that things maybe bottoming out. Note though, there were 3 consecutive monthly rises in house prices during the last downturn in 1989/1990.
There are also more brokers becoming overweight on the retail sector with claims that the worst is over for them. It might be hard to believe but their views are 6 months down the line and they believe that picking up stock at these levels will be serving them well towards the end of 2009.
We have also seen a slight up tick in some important survey data, in particular the important Purchasing Managers Index (PMI). The PMI has stopped falling for now and even ticked up in the last US and UK readings. The PMI is followed closely by many who believe it to be a good indicator as to what happens to GDP a few months down the line.
"Improved UK Markets?" last update by R Thomas, 20-Feb-2009
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