UK Interest Rates in 2009
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The FTSE 100’s rally at the end of 2008 and start of 2009 soon came to an abrupt end.
Nervousness is surrounding all of the Bank of England’s interest rate decisions. With the markets expecting anything from 0.5% to 1.50% cuts but the City has never been so split on what they think the MPC should do.
There are compelling arguments for everyone, whether you are in the dovish or the hawkish camp and the MPC has a very delicate balancing act to do.
One thing is for sure and that is the decision will be split and the market will probably react more to what the Bank says rather than what the bank does.
The hawkish argument is that cutting rates too much will only serve to hit Sterling again (despite the fact that it has recovered a little since its recent low against the Euro). Too much of a cut will leave less in the armoury for further cuts down the line.
Other hawks argue that the Bank should wait for the next Inflation Report before being too aggressive with its rate cutting. The report is due out on 11 February just after the February 2009 decision on rates is due. On top of this, the hawks believe that the government should now look at offering to boost the money supply as another prong of attack to get the economy moving again.
Finally, further cuts are becoming increasingly difficult for banks to pass on, but they have no problems with cutting savings rates. With the pressure coming from all angles to move in line with the BoE, the commercial banks that are left can barely charge anything for their money. That is one reason why we see banking stocks continue to struggle.
Keeping rates at the level they are now will at least mean banks can charge for lending their money and savers will have at least some reason to keep their money on deposit rather than under the mattress.
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For the doves the arguments are simple. The economy is suffering worse than it has for the last 60 years and there are 100 year old businesses crashing around us and unemployment is on the up.
As Angus Campbell of Capital Spreads recently said “in my view the calls that interest rates will hit zero at some point are extreme, interest rates will have to come down further, possibly reaching a low of 0.5%, so why wait? Sterling’s recent small recovery may be undone by a bigger cut, but the ECB will have to follow suit soon bringing its base rate down from 2.50% to similar levels, so whilst we cannot discount euro/sterling spreads hitting parity, it maybe short lived”.
So who wins? In my view both the doves’ and the hawks’ arguments can be easily quashed.
However, the government has still got other options in the armoury beyond the Bank of England’s rate making policy. Also, waiting around for Inflation Reports is not as important as it was 18 months ago when we were all worrying about stagflation. Right now, deflation is the real concern. Whilst savers may suffer now it probably the right time to take a little risk, with a five year view.
For those who have a large amount of savings on deposit, other investment and spread betting opportunities are surely becoming very attractive indeed.
"UK Interest Rates in 2009" last update by R Thomas, 19-Jan-2009
Warning: Financial spread betting carries a high level of risk. You can lose more than your initial investment or stake. Financial spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.
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