“In a widely predicted move, the Monetary Policy Committee has reduced UK base rates to 2% from 3%, a level last seen in 1951,” comments Chief Economist of Charles Stanley, Edward Menashy.
“It is now generally accepted that the UK economy is in the midst of the weakest quarter of the current contraction and further interest rate reductions may be required in the course of 2009.”
“Private investors have been pushed into the gilt market because deposit rates have shrunk and are set to reach yet lower levels and inflation is expected to decline sharply with the prospect of reaching -2% in the third quarter of 2009.”
Mr Menashy continues, “Furthermore, according to the Bank of England, there is a one in five chance of the UK economy going into deflation which would be a boon for bonds and anathema for equities.”
“Gilts, on the other hand, offer complete safety yet the gilt market at the short end is now heavily over-bought. The gigantic global monetary stimulus can be expected to avoid deflation and, unless handled carefully, could easily lead to hyperinflation, the great enemy of the bond market.”
“We are watching the bond market very carefully as the government will have to issue a large amount of stock to finance its borrowing requirement,” concludes Edward Menashy.