Hope for UK bank rate cut as Fed slashes interest rates by 50 basis points

31 January 2008 / by Verity G
The US Federal Reserve has cut interest rates by a further 50 points in a desperate bid to stave off a recession, just a week after its dramatic 75 point cut.

Initially the move to cut rates to three per cent triggered a boost in stocks before they settled down at closing, while the dollar fell to a record low against the Euro.

The cut follows on from last week's shock 75 point cut, which is the biggest easing of US monetary policy since the early 1980s and a move which aims to prove to critics that the Fed is one step ahead of the deteriorating economy.

The US financial markets have been struggling since the sub prime mortgages crisis of last year which has so far spread across most global economies and caused a widespread tightening of lending criteria.

However, economists have indicated that the Fed will consider cutting interest rates again, although the hope is that it will not have to before its next scheduled policy meeting in March.

In a written statement about their decision to further cut rates, the Federal Open Market Committee (FOMC) said: "Financial markets remain under considerable stress and credit has tightened further for some businesses and households."

Commenting on the outlook for bond markets Richard Woolnough, Manager of the M&G Optimal Income Fund, said: "The Fed's decision to slash rates doesn't change my view that a US recession is a probability this year, nor will it prevent corporate profits from falling across the board. I think central banks worldwide will continue to react to the severe slowdown by continuing to cut interest rates aggressively, which is good news for government bonds and investment grade corporate bonds."

Across the pond, the UK is still expectantly waiting for the next decision on UK base interest rate cuts from the Monetary Policy Committee following a plunge in the number of new mortgages approved which hit its lowest level for eight years.

The latest Bank of England figures were weaker than expected and revealed that building societies and banks only approved 73,000 loans for house purchases in the month of December, down from 81,000 in November and 114,000 in June.

It is now hoped that the Monetary Policy Committee, with the newly reappointed Mervyn King continuing in his role of Governor of the Bank of England, will take the decision to cut interest rates in the forthcoming meeting to be held on 6 and 7 February.

© Fair Investment Company Ltd