sharon sanders
Editor-in-Chief & President
Interest rates
In the bleak midwinter
Dec 6th 2007
From Economist.com
Britain cuts rates, Europe does not
AP
THE Bank of England rarely moves interest rates in December. But on December 6th the central bank, under Mervyn King, its governor, broke with habit and brought down the base rate by a quarter-point, from 5.75% to 5.5%.
Shortly afterwards, the European Central Bank (ECB) kept its benchmark interest rate unchanged at 4.0%. The contrasting decisions reflected differing worries in Britain and the euro area about the balance of risk between slowing GDP growth and rising inflation.
Both central banks faced a dilemma. On the one hand, the credit crunch resulting from the worldwide financial turmoil of the past few months will slow growth next year. On the one hand, the credit crunch resulting from the worldwide financial turmoil of the past few months will slow growth next year. On the other hand, recent sharp rises in oil and food prices are likely to push up inflation. In a statement accompanying the decision, the Bank of England said that higher energy and food prices were expected to keep inflation above the 2.0% target (it is currently 2.1%) in the short-term. The central bank’s monetar ypolicy committee (MPC) gave warning that “upside risks to inflation remain”.
However, its decision to cut rates was based on its concerns about a slowdown in growth, where it worried about “downside risks” caused by deteriorating conditions in financial markets and a tightening in the supply of credit to households and businesses.
Two recent pieces of evidence had underlined the risk of an abrupt slowdown. On Wednesday a survey of the big services sector reported an unexpectedly sharp drop in business activity, which weakened in November to its lowest level since May 2003. Arguably, the CIPS survey highlighted the central bank’s dilemma, since it also showed a pick-up in price pressures. But it came on the same day that the housing market became enveloped in yet more gloom. House prices fell by 1.1% in November, according to the Halifax index compiled by HBOS, a bank. It was the third month running that prices had slipped.
The clearest signs of deteriorating financial conditions have been in the money markets, where banks lend to each other. The three-month interbank rate is normally a bit higher than the base rate. At the height of the financial crisis in September, it rose to 6.9%. It then dropped a bit, but more recently rose again, to 6.6%.
This three-month rate is an important benchmark for much lending, especially to companies, thus monetary conditions have tightened since the MPC’s November meeting. This is likely to make firms trim planned investments. But the biggest threat is probably from slower consumer spending, the mainstay of the sustained economic expansion of the past decade....
http://www.economist.com/daily/news/displaystory.cfm?story_id=10259027
In the bleak midwinter
Dec 6th 2007
From Economist.com
Britain cuts rates, Europe does not
AP
THE Bank of England rarely moves interest rates in December. But on December 6th the central bank, under Mervyn King, its governor, broke with habit and brought down the base rate by a quarter-point, from 5.75% to 5.5%.
Shortly afterwards, the European Central Bank (ECB) kept its benchmark interest rate unchanged at 4.0%. The contrasting decisions reflected differing worries in Britain and the euro area about the balance of risk between slowing GDP growth and rising inflation.
Both central banks faced a dilemma. On the one hand, the credit crunch resulting from the worldwide financial turmoil of the past few months will slow growth next year. On the one hand, the credit crunch resulting from the worldwide financial turmoil of the past few months will slow growth next year. On the other hand, recent sharp rises in oil and food prices are likely to push up inflation. In a statement accompanying the decision, the Bank of England said that higher energy and food prices were expected to keep inflation above the 2.0% target (it is currently 2.1%) in the short-term. The central bank’s monetar ypolicy committee (MPC) gave warning that “upside risks to inflation remain”.
However, its decision to cut rates was based on its concerns about a slowdown in growth, where it worried about “downside risks” caused by deteriorating conditions in financial markets and a tightening in the supply of credit to households and businesses.
Two recent pieces of evidence had underlined the risk of an abrupt slowdown. On Wednesday a survey of the big services sector reported an unexpectedly sharp drop in business activity, which weakened in November to its lowest level since May 2003. Arguably, the CIPS survey highlighted the central bank’s dilemma, since it also showed a pick-up in price pressures. But it came on the same day that the housing market became enveloped in yet more gloom. House prices fell by 1.1% in November, according to the Halifax index compiled by HBOS, a bank. It was the third month running that prices had slipped.
The clearest signs of deteriorating financial conditions have been in the money markets, where banks lend to each other. The three-month interbank rate is normally a bit higher than the base rate. At the height of the financial crisis in September, it rose to 6.9%. It then dropped a bit, but more recently rose again, to 6.6%.
This three-month rate is an important benchmark for much lending, especially to companies, thus monetary conditions have tightened since the MPC’s November meeting. This is likely to make firms trim planned investments. But the biggest threat is probably from slower consumer spending, the mainstay of the sustained economic expansion of the past decade....
http://www.economist.com/daily/news/displaystory.cfm?story_id=10259027