News out this week investment banks may be lowering their forecasts on average oil prices through 2007 should spell good news for anyone considering investments of any kind.
True, many in the City are still pricing in a final 25 basis points increase in the base rate before the current monetary policy cycle changes gear and rates start heading south for the medium to long term.
But for those who can take the short-term pain, it means prices for assets may not be too overcooked, bearing in mind what turnover and profit growth may be unleashed through the second half of next year should interest rates start to reflect lower energy prices.
It looks certain along with a rising crimp on consumption caused by Gordon Brown’s latest play for greater tax revenues, falling oil prices will take pressure off the Bank of England to keep rates high in order to stave off inflationary pressures.
Added to this picture is the growing realisation parts of if not the entire US residential property market are heading into recession sparked by the cost of money finally coming home to roost after a non-stop number of hikes in the key Federal Reserve rate as its “target” changed from a low of 1% in November 2002 to the current 5.25%.
The great Christmas shopping season will determine just how strong US consumption is. Understanding the weak dollar is a bit more tricky: perhaps markets believe US interest rates need to rise, or perhaps they are concerned about US consumers being unwilling to reduce their overspend on imports (a weak dollar will make them more expensive). In any case, the effect on the UK economy is a hit to exports to the US and a number of other countries, which peg their currencies to the dollar. This all talks for a lessening of UK rates sooner rather than later.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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