Interest rates are likely to be cut further around the turn of the year as an additional stimulus to...
Interest rates are likely to be cut further around the turn of the year as an additional stimulus to the world's ailing economies.
Consensus suggests there is scope for more cuts in the US, UK and Europe, although the extent of such moves by the key central banks is in part dependent upon the nature of the economic data newsflow in the coming months.
Tony Dolphin, director of global equities at Henderson Global Investors, says the US Federal Reserve has almost finished its work, but may cut again around the New Year. He says: 'The Fed is just about done, but there could be another 25bp cut between December and January. If the economic data is less bad in January, it will stop cutting.'
Vivian Bazalgette, chief investment officer at M&G, says the 4.5% reduction in rates made by the Fed this year have had little discernible effect, although they have prevented the economy slipping into an even worse situation.
Bazalgette adds that, although he remains confident about a US recovery next year, underlying problems still remain that cannot be addressed by rate cuts. He says: 'This raises the question of the Fed running out of room to cut rates further and of lower rates proving insufficient to address the problems of overcapacity across many sectors of the economy, which falling demand can only aggravate.'
The ECB has far greater scope to cut rates, says Dolphin. He also anticipates Germany being one of the worst hit economies which could subsequently slide into recession. He is concerned that many observers are underestimating the extent of the negativity that the European economies still have to work their way through in order to reach recovery. He says: 'The market is still misjudging how weak Europe is going to be in the next three to six months. The weakest part of the cycle in Europe is going to be as bad as the worst the US saw.'
He suggests the market would be helped by a further 25bp-50bp rate cut, bringing interest rates down to the 2.75% to 3% range.
He notes: 'The ECB has a lack of self-confidence. The Fed is confident about its role in the US system and the MPC probably feels the same. The ECB is trying to build credibility and believes that if it raises and then lowers rates, it will lose credibility, so it drags its feet to make sure.'
The UK is different. Bazalgette says the case for the MPC's 50bp rate cut at the start of the month was tenuous. While consumer confidence has slipped, retail sales remain strong and inflation risk to the economy remains low. Manufacturing is weak, he notes, and the MPC's cut was predicated on concerns that the global slowdown will be longer and deeper than previously thought. He says: 'The UK stock market fell back in the hours following the rate cut, while Europe was broadly flat. This partly reflects investor concerns that the size of the cuts showed that the authorities have little confidence in the economic outlook.'
Dolphin says the MPC is unlikely to cut rates in the next two or three months at least, not wanting to overdo the stimulus to consumer spending. Strong US economic data for the fourth quarter may enable the MPC to sit back and feel they have done enough, but the outside chance of a further 25 basis points rate cut as an insurance policy cannot be ruled out, Dolphin adds.
Europe has scope to cut rates further.
UK is still looking robust.
Anticipation of better US economic data.
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