Guys

The Fed cut US interest rates today by 0.75% to 3.5% - a huge amount today.

Surely now the Bank of England will follow with a cut of its own?

And, as the £/ € rate hasn't crashed - can we assume that the ECB will want to cut rates too?

After all, the German Dax and European stock markets have caught a very nasty cold this week - falling 10% vs a more moderate fall in the UK? If Euro growth is slowing, then the basis for a Euro cut will be growing?

This will be happy relief to investors cashflow forecasts. But what other implications might there be?

Cheers
Neil

Hi Neil

Here's what European Central Bank President Jean- Claude Trichet told European Parliament in Brussels today:

``Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility.''

He's obviously implying he's not going to follow the Fed or the BoE, who will cut next time for certain.

But I reckon this is mainly rhetoric and the idea of Euroland now escaping the effects of what is affecting everywhere else - even Asia - is unrealistic in the extreme, especially with an overly strong euro. So I don't think there is any doubt the Euro rate will be cut.

The ECB is likely, I think, to do exactly what the Fed is already doing and the BoE will do very shortly - and that's trade some higher short term inflation for the need to stimulate economies.

What will be really interesting is just how much the Eurozone - and the euro members in waiting in CEE - will be able to stay apart from the general slowdown/contraction.

My bet is that momentum is so high in CEE going into the slowdown, that, while it will certainly be affected, it may well be far less than some predict. After all, real FDI didn't slow much last time - see http: / /propertysecrets .net /blogs /max _growth /the _15 _trillion _question _will _fdi _be _knocked _for _six _in _central _and _eastern _europe /post -102 .html

Either way, I don't think any of this changes the longer term argument for sustained and out-performing growth in the CEE economies.

And as an aside, a downturn in some economies might actually start to tempt migrants - especially from Romania (hundreds of thousands of whom are in Spain and Italy) and Poles in the Uk and Ireland, back to their home countries.

This would stem the massive amount of cash being sent to these countries from overseas (effectively exports), but it also would drive down labour costs in Poland and Romania and make these markets even more competitive.

What do others think?

cheers

The Fed cut rates again by 0.5% to just 3%.

The Pound to the Euro rate is steady at about 1.34 Euros per GBP.

Dollar weakens further against the Euro.

Hence, I conclude from this that any reduction in interest rates in the UK and Euroland will be similar but not on a large scale?

Euribor has dropped to around 4.3% (just 0.3% above the ECB base rate of 4%) therefore the liquidity crisis in the interbank lending markets has eased a lot.

What should we conclude from this? Here are my picks

a) stocks are extremely volalatile at present and to be avoided by anyone but day traders

b) interest rates in the UK and Euroland will moderate this year - but in line with each other

c) the GBP and Euro have reached a point of (temporary) stability

d) the reduction in the Euribor rates is very good news for investors whose mortgages are based on the fluctuating Euribor rate (as per Nobel bank in Poland).

e) There will be a rapid reduction and possible rescession in the US. Avoid property markets here until the country has turned the corner. Don't catch a falling knife!

f) The UK and Spain are slowly rapidly - again, there is no reason to enter these property market until it has turned the corner. We predict no growth opportunities for the next 12 months.

g) CEE and Eastern Europe - we are looking at a moderate reduction in growth from 6.1% in the region to around 5.3%. This is healthy and welcome as it will allow greater fiscal stability to be built up in the region at the expense of slightly slower growth.

Anyone else got a view?

Cheers
Neil

Here is a 6 month graph of Euribor.

This shows how rapidly interest rates have declined.

Cheers
Neil

Update - 7th Feb

The Bank of England has cut rates to 5.25% - but the ECB (Euro) has kept them on hold at 4%.

Both the UK and German stock markets have fallen by over 2% - obviously neither the UK nor Europe was very impressed by this.

Not quite sure why - but let's watch the £ to Euro rate over the next couple of days.

At the moment the £ fetches 1.34 Euros - which is pretty steady and has been the rate for the past 3 or 4 weeks - which suggests that this news is already built into the currencies.

Cheers
Neil

I've failed to get a graph onto this forum - but you can see the rapid decline in the Euriobor rate for yourself at

http: / /kurse .banking .co .at /011 /default .aspx?action=chartDetail &id=tts -1115651 &menuId=7 _1 &pathName=EURIBOR%203%20Monate &lang=de

Cheers
Neil

Hi Neil

Interesting times!

My view is basically we're seeing this slowdown led by the US, followed by the UK and the eurozone is a little way behind.

I think the £ is already slipping after today's BoE cut, but only a tiny amount against the euro. I think this is because, even though the ECB held rates, Trichet spoke after the decision very pointedly about risks to the eurozone from financial markets swinging all over the place AND a slowdown in major trading partners.

I think that has been taken as a clear sign that the ECB is on course to start cutting soon - a very different tune to earlier.

The markets don't have a clue what is going on, basically - a Fed cut of 125 basis points is great for a while, then it causes more panic (hey, things are worse than we thought!). No cut is a sign that the problems are not being tackled. A sign from the ECB that cuts are on the way strikes fear that maybe things are really, really bad and, anyway, they should be cutting now! And so it goes on.

The problem is, of course, that the eurozone has inflation at well over 3% - too high. But my view is that they will, just as the Fed and BoE will, have to trade some short term inflation in order to battle a steep slowdown. Like the BoE - and unlike the Fed - the ECB will probably make slow and steady cuts as they see the need.

I suspect, just as the US led us down this rocky road, we'll see the first signs of a smoother ride ahead in the States, rather than anywhere else.

Cheers

... continuing our interest in the world's base rates...

The Bank of England kept base rates on hold at 5.25% and took the view the medium term inflation worries were balanced by the risk of economic down turn.

Sterling vs Euro is stable at 1.30 - which is down a little on recent weeks.

Expectations are that rates will next fall in May and reach 4.5% by the year end.

Euro rates are expected to continue at 4% as the Eurozone and those economies closely linked to the Eurozone avoid the worse effects of the credit crunch.

Certainly, no major panic this month. Steady as she goes then?

Is it safe to go back in the water?

Cheers
Neil

As expected the ECB keeps rates on hold due to inflation concerns and a stable economic situation.

It looks like that will continue for a while.

Move cash into Euro demoninated bank accounts and assets then?

Cheers
Neil

Hi Everyone

The Fed has cuts rates to 3.25% from 3.5% in an emergency weekend cut.

Cheers
Neil