The Bank of England should cut interest rates by 1% to help the UK banking sector weather the credit crisis, according to Oliver Russ, fund manager of Argonaut European Income.
He says it is vital the Bank of England and the US Federal Reserve make major cuts to interest rates to help prevent a recession.
Russ has called on the Bank and the Fed to cut rates by 0.5% tomorrow, with a further cut of at least 0.25% in January or the crisis will worsen in the UK and could prompt a recession in the US.
He says the US would be ‘very lucky’ to avoid recession, and says the knock-on effect would be very damaging to sectors such as materials and resources.
He points out the UK is in a far worse condition to cope with the credit crisis compared with Continental Europe, as UK consumers have higher debt levels than their continental counterparts and are therefore more sensitive to interest rates.
However, Russ does not think it likely the Bank will make the cuts that are needed to help the UK economy.
He says: “The Bank of England is behaving like the British Governor in Carry On Up The Khyber, who when asked for his response to a crisis replies ‘We’re British – we won’t do anything.’”
Russ claims economic confidence could quickly recover, but says it is vital to unblock the credit system, as interest rates in the US and UK are very high by international standards.
“In my view, UK rates need to come down by 1% as soon as possible. This would enable the excesses that have built up in the economy to be gradually worked off, rather than undergo a painful and sudden readjustment,” he explains.
The Bank’s Monetary Policy Committee is to make a decision on interest rates tomorrow morning. However, most analysts believe rates will remain static, with a cut of 0.25% expected in the first quarter of 2008 and an expectation of further cuts later in the year.
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