How will rate cuts and recession fears affect personal finances?
23/01/2008
The Federal Reserve's decision to slash US interest rates from 4.25 per cent to 3.5 per cent yesterday – the biggest cut since 1984 – came as a shock to many, and has prompted even greater demand for a similar cut in the UK. With fears of a global recession looming, even tighter lending conditions and a drop in disposable income, a review of personal finances may be worth considering.
Head of investment strategy at Fidelity International, Michael Gordon, says: "The precipitous falls on world equity markets since the start of the year confirm what many of us have suspected for a while - the credit crunch that began in the US sub-prime mortgage market last summer is having a profound impact on the real global economy."
The rapid decline of the FTSE 100, particularly on January 21, has caused alarm among UK investors, many of whom are now considering withdrawing from the stock market altogether. "So what should investors caught up in this maelstrom do? My suggestion is that they do nothing: history shows that this is usually the best course of action in such situations," says Mr Gordon.
"All too often private investors are sucked into a market at its peak and then exit at the bottom. Tempting as it might be to withdraw money when markets drop sharply, this merely crystallises an individual’s losses."
Deputy governor of the Bank of England, Sir John Gieve, has joined the call for a cut in UK rates. "The case for easing has been greatly strengthened by the global disruption in global credit markets and in our own banking system which brings a risk of a deeper downturn," he says. This should help to reduce pressure on mortgages, although mortgage companies are not legally obliged to reduce fixed rates in line with the base rate.
Despite this, Bank of England governor, Mervyn King, warns: "It is likely that a less buoyant housing market will go hand in hand with slower growth of consumer spending. In the short run, that will slow economic activity, possibly quite sharply."
He is also anticipating "above-target inflation and a marked slowing in growth" for 2008.
In the event of an interest rate cut, it may be worth considering interest-only mortgages and reconsidering savings accounts and credit card deals. A reduction of at least 0.25 per cent in early February is widely anticipated.
© Fair Investment Company Ltd
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