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MPC Sees The Need for Further Cuts

MPC Sees The Need for Further Cuts …..

The minutes from this month's Monetary Policy Committee meeting revealed that the MPC recognised the need for a cut in rates of at least 200 bp to ensure that their long-term inflationary goals would be met. However, they decided that a cut of this magnitude might have serious adverse effects on the value of the currency and hence distort inflation measures in the short term. They also decided to keep at least some of their powder dry so that additional easing could be introduced at later dates in order to try and improve sentiment as/if the economy worsens. On the back of this it looks odds on that we will see a further cut at the December meeting with the market looking for a 0.50% move lower in rates. Period rates ought to continue to ease on this assumption but so far, there has been little evidence of this happening to any great degree.

Yesterday, we also had the presumed gloomy CBI Manufacturing survey and the market was not disappointed. Despite a small up-tick in the orders index, the overall report was awful with the November index of expected orders falling to a 28-year low. More ammunition for the ‘further rate cuts brigade'.

Today will bring the October data for UK Retail Sales. There is absolutely no doubt that the figures will be grim following press reports of dismal High Street conditions and pre-Xmas sales announcements from such stalwarts as Marks & Spencer, John Lewis and Debenhams. It would not be a surprise if, even in the Xmas run in, we saw a complete standstill in consumer spending y-on-y although the expectations are for a small rise.

The Federal Reserve minutes from the last meeting were also out yesterday afternoon but followed a similar pattern to the UK version. The Board revealed a gloomy economic outlook with potential for further monetary easing. They lowered their estimates for GDP and increased their projected unemployment level, both for the end of 2009. One thing that was mentioned in the minutes, and something that will crop up more and more in the future given the global economic situation plus the uber-low level of interest rates, is ‘quantitative easing'. This entails a government introducing measures that not only flood the market with excess liquidity but also reduce long term interest rates. Last used in Japan during their long period of deflation (not to any great effect for a long time I add) and likely to become more popular amongst Western Governments during a prolonged grind down in economic activity.

The Dollar itself suffered a tad yesterday as news of the US automotive industry went from bad to worse. Paulson is still resisting using any of ‘his' fund as a bail out but agrees that cash needs to be found. January is still ‘D-Day' for GM and Chrysler who are predicted to have run out of money by then. The market will remain nervous on the outcome until the ink is dried on any cash injection. This is definitely not a cast-iron certainty and definitely Dollar negative. The uncertainty also adds to downward pressure on oil but the $50 level remains a strong support.

In Eurozone there have been further comments from ECB members advocating further rate cuts but the feeling is that any reductions will be small by comparison with the UK and US which over a period of time, might give some support to the Euro. If however, the Bank's monetary easing is perceived to be insufficient to reverse the economic downtrend, we could see a severe adverse reaction on the exchanges.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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