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Will The BoE Deliver 50 Or 150 Basis Points Today?

Will The BoE Deliver 50 Or 150 Basis Points Today? ……

…either way, real interest rates are headed to zero (and not only here but in Europe as well). The difficulty now of course is trying to predict both when and at what level inflation hits the bottom of the cycle. Only then will we be able to predict by how much official rates will need to be cut. Even then, on the assumption that neither Central Bank will veer towards quantitative easing measures, it is likely that the yield curves for periods out to 12-months in both GBP and EURO will remain strongly positive. Today it appears now widely accepted that cuts in Sterling rates will do nothing to alleviate pressures arising from the headlong plunge into recession. It is still the squeeze deriving from the Credit Crunch that is causing the pain and thus prolonging the time before recovery. It is essential that the UK Government, by hook or by crook, either finds ways to ‘persuade' the High Street Banks to renew lending to the corporate sector especially or introduce ways through which the BoE is able to supply liquidity directly to companies that require it such as the Federal Reserve's ability to purchase short-dated Corporate Debt directly from the issuer or perhaps via an instrument such as the now rarely used Acceptance Credit. In each case, if the Bank's are unwilling lenders then they could be circumvented.

Today, as stated above, interest rate decisions are the focus and are occurring throughout the day in a proliferation of nations. We have already seen official cuts in New Zealand (down 1.5% as expected), Indonesia (down 0.25% as expected) and in Sweden (down a massive 1.75% - much larger than expected). The latter move has prompted revisions to the predicted size of the ECB cut later today from 0.50% to as much as 100 basis points; the UK cut prediction still occupies a wide range, as above, but I would see a 1% cut today (to 2%) with more to follow in the spring. We also see a scheduled decision from the Danish Central Bank this afternoon and a possible announcement from The Reserve Bank of India either today or tomorrow.

Sterling looks vulnerable on a larger than 100 basis point cut. We are sitting precariously near the edge of the abyss that is the gap between 1.40 and 1.05 in cable and the all-time low in Sterling/Euro. This factor must play a part in the MPC's thinking and is yet another reason to consider that the chances for a greater than 1% cut in rates is slim. In the short term, the Euro could possibly benefit on the exchanges through the ECB's leaning towards smaller reductions in rates. Going forward however, and assuming that Euro real rates are also heading for zero, the obligation will be for the ECB to continue cutting for longer than both the BoE and the Fed and as such the Euro will soften globally on the exchanges going into the 2nd half of 2009.

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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