5pm GMT update
Stocks hit by rate fears
- guardian.co.uk,
- Wednesday January 23 2008
The FTSE 100 deepened its losses today after hopes of hefty UK interest rate cuts were punctured by the latest news from the Bank of England.
At one stage, the FTSE was over 200 points down, but it recovered slightly after Wall Street's opening 2% fall was no worse than expected.
The index of leading London shares closed down 130.8 points at 5,609.3, a 2.3% fall. It has shed 5% this week.
The Dow Jones industrial average dropped 240 points in the first 20 minutes of trading but later pared losses to be down 150 points, or 1.3%, by 4.45pm GMT.
Financial markets are braced for more mayhem in the weeks ahead. Although an emergency interest rate cut from the US Federal Reserve yesterday provided some support, traders described it as little more than a stop-gap.
In London this morning the mood darkened after it emerged that the Bank was not as divided over holding interest rates this month as the market had thought - with just one policymaker voting for a cut.
There was disappointment that minutes from the Bank's January rate-setting meeting showed it is unlikely to follow America's lead by making big reductions to borrowing costs in the UK.
"The market was looking for a very close call, maybe five in favour of keeping rates on hold and four in favour of a cut, but 8-1 is a nasty shock," said Martin Slaney, head of derivatives at GFT Global Markets.
'Force 10 gale conditions'
The Bank's minutes added to volatility in an already jittery market, nervous about the prospects of a US recession.
After the Fed's emergency rate cut failed to lift US stock markets yesterday, doubts persisted today about the move's effectiveness.
"Everyone knows that the Fed's action is little more than a sticking plaster for the market," said one trader.
Market players predicted erratic trading would continue at least until the Fed's scheduled rate-setting meeting next week.
"Volatility is extremely high again," said another trader. "It could continue for the foreseeable future."
Although the markets are currently pricing in another 50 basis points of rate cuts from the Fed next week, those expectations could change depending on equity markets, he added.
Long-time City commmentator David Buik of Cantor Index spoke of previously unseen volatility, describing London's market as "bouncing around in choppy seas like a cork in a bath".
Markets in Germany and France have seen similarly erratic trading, ending sharply lower.
The Fed's unexpected decision to cut US interest rates by 75 basis points to 3.5% yesterday had turned sentiment around in Asia and Europe and saw the FTSE 100 index close up 161 points, or 2.9%.
However, the cut was also interpreted as a sign of deep concern about the world's biggest economy and reinforced fears of an impending recession. For US stock markets the prospect of lower borrowing costs was today again outweighed by such worries of slumping demand.
'Panicking in the face of market pessimism?'
Economists were split over the wisdom of the cut, and some expect further reductions.
"One could say the Fed has finally understood the magnitude of the problem faced by the US economy - either that, or they are panicking in the face of market pessimism," said Rob Carnell at ING Financial Markets.
"Clearly rates will fall further in the US. The markets expect 2.00% by October, it could be lower."
Many in the markets have been looking for similar action by the UK central bank, but today's voting pattern from its last meeting and comments from governor Mervyn King poured cold water on those hopes.
Minutes from the last meeting, when British interest rates were left at 5.5%, showed eight policymakers wanted to keep them steady while one, David Blanchflower, voted for a cut.
The minutes' focus on a worsening outlook for upward price pressures echoed comments last night from King, who said higher oil, gas and food prices could all push up inflation in the months ahead. He did warn that UK economic activity may slow "quite sharply" in the months ahead but also hinted that the Bank would shun the kind of drastic action taken by its US counterparts.
Bank dents interest cut hopes
Wednesday, 23 January 2008
Hopes that the Bank of England will follow America's lead with dramatic interest rate cuts were dashed today after policymakers warned the UK's inflation outlook had "worsened markedly".
Minutes of the January rates meeting highlighted the dilemma faced by the Bank's Monetary Policy Committee (MPC) after members raised concerns over a potent mix of slowing growth and rising inflation.
The minutes come amid growing calls for a 0.5 per cent cut in the cost of borrowing when the Bank next meets to discuss rates on February 6 and 7.
A shock decision yesterday by the US Federal Reserve to slash the cost of borrowing by 0.75 per cent has added to pressure on the Bank to lower rates.
But Bank Governor Mervyn King last night signalled that the UK would not follow America with similar emergency rate cuts to stabilise stock market and economic turmoil.
And today's minutes showed that the Bank was concerned that hasty rate cuts would suggest it was more concerned about preserving economic growth than keeping inflation under control.
Eight out of nine members of the MPC voted to keep rates on hold, with David Blanchflower the lone voice pressing for a reduction to 5.25 per cent.
The minutes showed the Bank's concerns that the short-term outlook for inflation had "worsened markedly" amid soaring oil and food costs and with energy price hikes on the horizon.
Mr King cautioned in a speech last night that inflation was set to continuing creeping up past the Government's 2 per cent target this year.
He told the Institute of Directors in Bristol that he may need to write one or possibly more open letters to the Chancellor - required when inflation hits more than 1 per cent above target.
But the minutes today showed the MPC's struggle to balance inflation with growth, as it said it there remained a "significant downside risk to UK activity".
It suggested it would rather digest next month's quarterly report on inflation before acting on rates.
The committee added that a cut immediately after the quarter point reduction in December might suggest the Bank was "focused more on stabilising demand than meeting the inflation target".
Jonathan Loynes, chief European economist at Capital Economics, said the minutes indicated that rates were set to come down, but perhaps less rapidly than expected.
He said: "It is quite clear that UK interest rates are heading lower in 2008, starting in February.
"The pace of monetary loosening will depend in part on conditions in the markets - if recent sharp falls in equity prices continue, the MPC may be forced to cut rates fairly quickly."
He added: "However, it looks likely that the committee will prefer to bring rates down at a relatively measured pace, perhaps one 25 basis points cut per quarter."
Mr King said in last night's speech that the UK economy faced its toughest challenge since 1997.
Inflation remained above target for the third successive month in December, at 2.1 per cent.
The committee said it believed inflation would rise "quite sharply" in the early part of 2008, with the latest round of energy bill increases adding to higher food and petrol costs.
Rates are widely expected to come down next month, in particular amid the stock market turmoil seen this week on fears of a US recession.
While a cut to 5.25 per cent is thought to be on the cards, the British Chamber of Commerce today urged the Bank to moves rates down by a half point to 5 per cent in the February vote.
The US Federal Reserve's surprise move to reduce rates caused a much-needed rebound in global markets.
London's FTSE 100 index soared 3 per cent yesterday after the US rates move, which came after a torrid start to the trading week.
On Monday, the Footsie suffered its worst one-day points fall since the September 11 terrorist attacks in 2001.
But more turbulence is expected, which may have a bearing on the Bank's February rates vote.
Howard Archer, chief economist at Global Insight, said: "We forecast rates to fall to 4.25 per cent by early 2009, however with the downside risks to the UK economy mounting, there is growing likelihood that rates will fall further and faster than this."
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