The 25 basis point cut from the Bank of England is unlikely to halt the downward trend in the markets
By this week, the City will have recovered some equilibrium after the surprise 25 basis point interest rate cut from the Bank of England, bringing the UK base rate to its lowest level for 50 years. The stock market initially reacted well to the move, but as commentator Peter Wyman warned: no-one should mistake this for good news.
For a start, the UK economy is obviously not going as swimmingly as Chancellor Culpability Brown would like. Of course, the Treasury has nothing to do with monetary policy. But what precisely has changed in the three weeks since Bank of England Governor Eddie George accused gloomsters of painting an unnecessarily dark picture of the economic outlook?
The stock market is still heading south, despite the occasional bluff of a rally. The FTSE 100 is now around half its level in December 1999, having lost something like £8 trillion. The property market remains intact, despite fears that the bubble may burst. Consumer spending has slowed, even if anecdotal evidence suggests most outlets had a better Christmas season than expected.
The main criticism of the latest rate cut is that it will re-ignite a credit spree, and that individuals will again be amassing private debt they will struggle to pay off. For some, cheap money is irresistible, but even the most profligate punter is now more cautious, not because the message about prudent budgeting is a getting through, but because of the creeping war psychosis.
The gut reaction of many to the news of the first UK interest rate cut for more than a year, was that the country is now definitely going to war, and easier money in the next couple of months might help absorb the shock. Sure, manufacturers are in a piteous state, but since when has the Bank of England ever heeded the pleas of embattled sectors like this before?
A war premium is now being built into pretty much everything, from financial markets to the availability of plumbers or snow shoes. (Both plumbers and shoemakers, apparently, are being swept into war preparations, leaving the rest of the country to fend for themselves). Officials take the view that only those who are part of the problem would dare question the solution.
But investors need to separate out the very different dangers swirling around in what ECB President Wim Duisenberg (in the most sensible thing he's said for four years) called 'this sea of uncertainty'. Job losses across the UK are mounting, from Boots to United Biscuits to Buzz. Around 42,000 jobs are expected to go in this quarter. Is this due to war uncertainty? Hand on heart, you have to say it is not.
On a global scale, the gold price is at its highest for six years, the dollar is at its lowest for four years, the Dow is in a three month trough. US companies are going bankrupt at an unprecedented rate, unemployment is rising and car sales are dropping. Is this due to war fears? War is just the latest of a number of growing concerns, such as the economic health of the US, Japan, Continental Europe and key states in South America.
The UK rate cut is a perhaps a gamble in terms of credit expansion. But the greatest risk is that it achieves precisely nothing, and is seen as a signal of policy weakness and confusion. It won't bolster spending because people are already cutting back. It won't help sectors in need, because it's too late. It won't boost confidence, because fear is more deeply entrenched.
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