Interest Rates and Green Shoots
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Whilst the Bank did what the market expected there is now a large contingent who believe that more cuts and any move lower towards 0% interest rates will be a huge over reaction by the UK’s central bank.
So far in their relatively sort lived life time as an independent bank they have not exactly covered themselves in glory. Only a year ago the UK base rate was still over 5% and the major concern for the MPC was inflation.
The circumstances have changed at such an alarming pace in the last 12 months that it has even led to rate cuts being made outside their normal meetings in order to get the banking system functioning properly again. We should just about start to see the action of the big cuts back in October and November but we’re still a few months off from seeing the full effect.
However, as the pessimists of these rate cuts point out they benefit the few and punish the many with those lucky enough to have tracker mortgages being the only people better off and the ever increasing number of retired, who rely on income from savings and annuities, being the worse off.
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The problem still lies in the banks being able to function as banks. What the Bank of England is doing is preventing them from charging for their money and whilst the consumer is struggling both from a back log of debt and now many without a job the banks cannot just give away their money. Rate cuts are one thing, but what will really assist the economy is the flow of credit.
On the plus side there are already some slightly more optimistic views about the recovery filtering into the press and amongst economists in the City. The use of this “R” word comes with a huge note of caution, as we’re not seeing an “R” yet.
Yesterday’s rise in House Prices for January came as a surprise and whilst it does not mean the trend downwards is not over it is possibly an indication that things maybe bottoming. Note though that there were 3 consecutive monthly rises in house prices during the last downturn in 1989/1990.
There are also more brokers becoming overweight the retail sector with claims that the worst is over for them – hard to believe but their views are 6 months down the line and they believe that picking up stock at these levels will be serving them well towards the end of 2009.
We have also seen a slight up tick in some important survey data, in particular the PMI which has at least stopped falling and even ticked up in the US and UK in their last readings. PMI is followed closely by many who believe it to be a good indicator as to what happens to GDP a few months down the line.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It 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.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Interest Rates and Green Shoots' edited by DB, updated 06-Feb-09
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