And finally, we couldn’t leave you without mentioning today’s meeting at the Bank of England.
Most economists expect to see a quarter of a per cent cut, some think the cut could be even bigger – although there are still those who fear that inflationary pressures mean rates should be left alone.
To an extent, it seems irrelevant. We have seen money markets go to the opposite extreme from the position they occupied three years or so ago. You will probably recall Alan Greenspan talking about a conundrum. At the time, the long-term rate of interest set by money markets was at a similar level to the rate set by the Fed – it even dipped lower. This was known as a reverted curve. It was called a conundrum, because in the past such a phenomenon seemed to occur shortly before a recession, something Greenspan thought was unlikely.
Actually, although Mr Greenspan called this a conundrum, he chose these words more to try and focus press and market attention, than because he didn’t know what was happening. The truth was that money was flooding in from overseas –from Japan, from China and from OPEC countries. The rate of interest set by the markets was low because the supply of money was so plentiful. Mr Greenspan knew this.
Now, things are tight. As you know, many banks have been upping mortgage rates of late, LIBOR rates have remained high. Even if the Bank of England were to slash rates today, don’t expect the cost of borrowing for Joe public to fall any time soon.
That’s not to say markets won’t react; eventually – they will. And that brings us to the pound.
Yesterday, the pound fell to another all-time low against the euro. The reason: expectation of a fall in interest rates.
With inflation rising in the Eurozone, and with the region in reasonable shape – although Spain, Ireland and Italy have their fair share of problems, it seems likely the rate of interest in the Eurozone will stay on hold for a while. In fact, there is an outside chance that by the year’s end, the British rate of interest set by the Bank of England could be lower than the Eurozone rate.
When the rate of interest falls in a country, it becomes less attractive as a host for money deposits, so money leaves, causing the currency to fall. It was expectation of this that led to the recent falls in sterling.
A lower pound could be good for the UK. We are more reliant on overseas trade than the US, and so a falling pound may have a bigger impact upon British exports than a falling dollar on US exports.
But don’t underestimate the importance of the US on worldwide trade. As the US slows, so will trade. The effect won’t be immediate – but the global economy has relied upon the US consumer for a long time. The jury is out as to whether the US consumer has paused for breath, or is in bigger trouble than that – but it is naive to assume the global economy can shrug off the effects of a slowing US. The IMF put the chances at one in four that global growth will fall below 3 per cent this year – and by some definitions that is a recession.
Now is not the time for the UK to pin its hopes on an export-led recovery, prompted by a falling pound.
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