Well the Bank of England lived up to expectations and we now sit with interest rates ‘merely’ 2.25% above the US and some 5% above Japan and even 0.75% above China (growth 10%, inflation over 6%!!).
With FX traders hunting in packs for possible rate reducing central banks there are few arguments for using high rates to prop up your currency. The nature of trading is usually to buy the rumour sell the fact. Witness the rise of the dollar since they cut rates unexpectedly over the past few weeks. When markets see a possible long term decline in interest rates there is always the tendency to sell the currency concerned causing an overall negative trend.
The arguments of economists that inflation is the great destroyer may be correct if economies are stagnating (and if inflation is very high) but if the stagnation is to some extent caused by the very tool that you are using fight your battle then the whole thing becomes pointless.
Adding the Northern Rock loans to the national debt makes for great headlines but it also shows how spineless the ONS actually is. At least the Northern Rock debt is backed up by a rather good mortgage book on the other side of the balance sheet. There is a whole host of much more deserving quasi government loan guarantees (witness the Metronet £1.7bn disaster) that Gordon Brown has managed to offload from the numbers. It is not this one off addition that should be worrying the markets it is the ongoing reduction of taxable income that is rather more important. Whether you like banks or not they pay many billions in corporation tax into the Treasury coffers. After the huge Q4 07 write off of sub prime exposure they will not only be paying substantially less but in many cases will be clawing back pre-paid ‘in arrears’ corporation tax.
The future does not look particularly bright either as Treasury forecasts will have assumed ongoing increases into 2008/09. The financial sector, and by association many other sectors, may well be giving substantially less than expected over the coming 2 years. The cumulative effect of this, even if the economy does not slow, is likely to leave the Public sector Debt/GDP ratio looking very poor indeed. It might not feel like it at the moment but the likelihood is that Gilt yields will widen considerably making long term borrowing costs considerably more expensive. This is how national economic disasters snowball. Higher Debt equals higher lending rates demanded by government bond investors equals greater percentage of tax revenue just to pay interest burden equals lower growth equals higher debt equals higher lending rates etc etc. Unfortunately this is a rather depressing vision so we will all hope that it does not become fact.
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'Interest Rates Trading' edited by DB, updated 13-Feb-08
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Adding the Northern Rock loans to the national debt makes for great headlines but it also shows how spineless the ONS actually is. At least the Northern Rock debt is backed up by a rather good mortgage book on the other side of the balance sheet. There is a whole host of much more...read article: Interest Rates Trading.
Risk Warning: Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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