Wednesday, December 22, 2004

Hmm, is that a whiff of deflation I detect in the air?
Sterling fell for the second straight session in European morning trade on Wednesday after the surprise revelation that the Bank of England considered cutting UK interest rates earlier this month.

The minutes of the December meeting of the Bank�s monetary policy committee, released on Wednesday, showed that a discussion about cutting rates was prompted by the growing possibility of inflation undershooting the Bank�s 2 per cent target in two years� time. The risk of a global economic slowdown had also risen since November, according to some committee members.
Here's the word straight from the horse's mouth:
Overall, the news on the month was mixed. . . . For some members the news was balanced and no change in interest rates was appropriate. For others, the downside risks to the inflation projection had increased, but not enough to make a persuasive case for a reduction in interest rates. All members concluded that no change in the repo rate was appropriate this month.
With home prices beginning to fall in London and most other regions, combined with tepid inflation rates and a global slowdown next year, some are starting to predict an early 2005 cut in the Bank of England's repo rate.

I'm looking for the management of asset bubbles to drive interest rate policy in the near term a lot more than consumer price inflation. A big asset bubble pop with current levels of debt across the Anglosphere would signal a dark, dark future.

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