Further Interest Rate cuts?
Expectations of another rate cut have risen after the release of minutes from the Bank of England meeting at which rates were lowered from 4.5% to 3%. The Bank’s nine-member committee voted unanimously for the cut on 6 November, but considered a bigger one.
The Bank’s own calculations showed that a cut to 2.5%, or even lower, would be needed to stop inflation falling too far below its target next year. But the rate-setters decided such a big cut would come as too much of a shock.
“We continue to expect interest rates to fall to 1% or even below next year ” said Jonathan Loynes from Capital Economics
The one-and-a-half percentage point cut they agreed on was the biggest reduction since 1981, and took rates to the lowest level since 1955.
“It’s confirming that we’re going to see more rate cuts from the Bank of England, and more aggressive rate cuts,” said Audrey Childe-Freeman from Brown Brothers Harriman.
What does this mean for the pound?
Well, usually lower rates will mean a weaker pound, so rates could well become worse as 2008 draws to an end and we enter 2009.
GBP V USD
In the States the producer price index (PPI) plunged by 2.8% the biggest drop since records began in 1947. The PPI illustrates how much firms pay for goods and services and falling prices indicate faltering demand and therefore recession. However, despite this big drop the announcement had very little impact on cable (GBP v USD) as the earlier UK inflation report was seen to have a bigger impact in the market.
The UK is facing some challenging times ahead, reports of job losses upwards of 3 million within the next couple of years, house prices tumbling and banks remaining under severe pressure and unwilling to lend even Bank of England MPC member Tim Besley stated that the future was “uncertain” and “daunting.” So, with the UK facing unprecedented economic uncertainty the pound is likely to remain under pressure for some time.
NZD and AUD
Rates still very favourable and above average. Despite falling from the large spikes we saw last month, rates are still well above average for the year. With a very unstable pound, if you have requirements for antipodean currencies, consider acting soon!
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