Tuesday, May 10, 2005

The Big Slowdown appears to have arrived in the United Kingdom. Manufacturing output is down, retail sales are down, home sales are way down. As a result of the mounting gloom,
Speculation that the Bank of England will be forced to cut rates despite its worries about inflationary pressure rose yesterday as analysts said evidence was mounting of a widespread economic slowdown.

The Bank's Monetary Policy Committee voted to leave rates on hold at 4.75 per cent yesterday, but traders rushed to place bets on a cut before the end of the year.
I would agree that the chances of a Bank of England rate cut are high in the short-term. And that means more cheap money sloshing around the global economy for the US to absorb!

Case in point: government debt interest rates. Currently the yield on a 10-year US treasury is 4.27%, whereas in the UK the yield is 4.51%. If a 25 basis point cut drops the UK 10-year around that much, then -- voila! -- the US becomes a more attractive place to plant your excess capital.

Make no mistake. Britain is a big net importer of capital. In 2004 the world sank �84bn into UK portfolio investments, and British investors made �137bn in investment income from abroad. That's around $420bn of capital which the US could begin tapping later on this year if US rates continue to rise and British rates fall.


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