The Bank of England MPC minutes from the meeting on the 6th of November revealed that the committee considered reducing the base rate by more than 1.5%. On the basis of the projections in the November Inflation report, the MPC decided that a major reduction in the base rate will be required to meet the 2% inflation target in the medium term. The November projections substantially revised downwards the growth and inflation forecasts from the Bank’s August forecasts. The MPC thinks the current projections indicate that a cut in excess of 200 basis points might be needed. The MPC decided to cut by 150bps at that time and did not cut by more due to several factors. Firstly, the MPC wished to see more details about the UK Government’s planned stimulus package and assess how this would impact on the economy. Secondly, the MPC wanted to see how the extraordinary measures implemented to support the banking sector were evolving. Thirdly, some members wished to save some of the required easing for the months ahead to support confidence at that time. Fourthly, and most importantly, the MPC was concerned that a larger cut would cause too great a surprise to the financial markets and depreciate sterling excessively. The minutes are clearly indicating that more easing will be required. We expect that the MPC will reduce the base rate by about 100bps at their next meeting in December.
In the US, the minutes of the last FOMC meeting were released. The Fed now thinks that the US economy will contract until the second half of 2009, with overall growth in the US in 2009 being flat. The members of the FOMC also saw inflation falling significantly in the coming quarters and edging lower after that. There was some discussion on the risk that inflation could move lower than a level consistent with price stability. Members of the committee also saw substantial risks to growth even after the cut of 50bps agreed at the meeting – which took the interest rate to 1%. They anticipated that economic activity would remain weak in the coming months and said they would take whatever steps were necessary to support the economic recovery. Some participants suggested that additional policy easing could well be appropriate at future meetings. The minutes are indicating that the Fed are preparing to cut again and may take the interest rate to 0% in the coming months.
Equities in Europe and the US finished well down. The S&P fell by 6.1% and the FTSE fell 4.8%. Sterling appreciated against the Euro moving below £0.84. It fell against the dollar moving down below $1.48. Oil prices continue to slide with Brent Crude one month forward trading close to $50/barrel.