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Wednesday, January 23, 2008

Interest Rates

The Fed's cut in interest rates yesterday by 0.75%, has put pressure on the Bank of England (BoE) and ECB to follow suit and act in a co-ordinated manner to stabilise the world's financial system.

Mervyn King, Governor of The Bank of England, gave a warning last night that the UK economy faced its toughest period in more than a decade during 2008. He also gave a hint that rates would be cut, at next week's BoE MPC meeting, by noting that the current rates were bringing downward pressure on demand.

Despite expectations of a cut in UK interest rates, it is unlikely that they will be cut by more than 0.25% (last month's MPC meeting minutes showed a vote 8-1 in favour of no change).

The ECB, not exactly known for its responsiveness to economic reality, is also facing pressure to cut rates; the Euro is already sliding as the market prices in a cut.

The Fed is due to meet next week, and will cut rates again by an expected 0.5%. Once this happens the pressure on the BoE and ECB to follow suit will be irresistible; otherwise their inaction, in the face of aggressive American rate cuts, will in fact further destabilise the world's financial markets.

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