“The continued deterioration in the UK economy has pushed the Monetary Policy Committee (MPC) to cut base rates to 1.5% down 0.5 basis points since the December 2008 meeting. This reduction marks the lowest level of interest rates since the Bank of England was founded in 1694,” says Edward Menashy, Chief Economist at Charles Stanley.
“Past reductions in interest rates have not been fully passed on by the banks to their customers and the Bank of England’s latest credit conditions survey found that lenders had reduced the availability of credit over the past three months. Clearly the banks need to make further bad debt provisions as a result of the severity of the recession, whilst the Government is also considering injecting more capital into the banks.”
“Whilst the credit crunch continues to blunt the effectiveness of interest rate reductions, the MPC will be tempted to follow the US Federal Reserve’s example and pursue quantitative easing or policies which will increase the quantity of money in the economy through the purchase of a variety of assets.”
“As a result of the cuts in VAT, falling energy prices and lower mortgage costs, the general expectation is that the Retail Price Index measure of inflation will fall below zero in the course of 2009. The trough of that decline is expected around the third quarter of 2009. Thereafter both inflation and interest rates can be expected to rise.”
“Clients seeking to maximise income should consider corporate bonds, whilst high taxpayers seeking to protect their capital should consider short-dated index-linked gilts.”
