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UK Interest Rates on Hold at 5.75% As Financial Sector Crash Continues

Interest-Rates / UK Interest Rates Sep 06, 2007 - 09:01 AM GMT

By: Nadeem_Walayat

Interest-Rates The Bank of England kept interest rates on hold at 5.75%, the move was widely expected as the credit crunch continued to hit the financial sector which has seen sharp drops in stock prices of financial institutions such as Northern Rock as the credit crunch increases financing costs across the sector. This was evidenced by the recent surge in the inter bank LIBOR rate which resulted in the Bank of England to provide additional liquidity.


The bank broke with tradition of by issuing the following statement : In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally.  The MPC's mandate is to set interest rates to meet the Government's 2% target for CPI inflation.  So the Committee discussed these developments and other economic data in terms of their implications for the outlook for inflation. 

It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households.  As stated in its August Report , the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation.

Against that background, the Committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term. 

The standing Market Oracle forecast has been for UK interest rates to peak at 6% at the October Meeting, however this increasingly looks unlikely as the credit squeeze impacts on the real economy which 'should' also start to reduce inflationary pressures and reduce the money supply. The unknown equation is whether further subprime hits in the financial sector will put the nail in the coffin of a further interest rate rise or not, if the defaults to date are merely the tip of the subprime mortgage and CDO ice berg, then it is highly probable that interest rates have now peaked and the next move will be for a cut in early 2008 or in response to a financial market crash.

The following recent articles explain the dynamics of the credit crunch and the continuing impact on the financial sectors

By Nadeem Walayat
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