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Bank of England cuts rates
Kevin Gyateng of Corporate FX joins CNN to discuss the mortgage crisis in the U.S. and a rate cut from the Bank of England
First to the Bush plan. Oh, it does seem that it excludes more people than it includes?
That's right. I mean that if you look at who the plan's aimed at, it is really borrowers who are, seem to be solvent not more than thirty days behind payment or sixty days throughout the course of the year with regards to their payments. So I think the in(itial), the original indication that it will help about 1.2, or 1, over 1 million subprime borrowers seems to be a bit mislaid if you like. And I think if when the market digests the full implications of the plan, there may be a bit of a reassessment thanks to its reaction to it.
Oh, really, so, because we did see the markets rally yesterday. So you think that was just a knee-jerk reaction that we are seeing something.
You also, you always see a knee-jerk reaction. I think what the plan did suggest or does suggest is that the actual extent of the subprime fallout from foreclosures. I mean if foreclosures do accelerate through a resetting of mortgage rates. What that's likely to do is put further pressure on house prices which is good for nobody. Home builders or the consumer. So that the initial reaction is to say, hey, this is gonna actually stand that impact and it is seen as er, US positive. I think going forward, as the plan is actually further analyzed. I think the obstacle will be more evident.
And here in the UK, we saw interest rates cut yesterday. Now is this also a response to the credit crisis in a way?
I think more, it is, the credit crisis has backed a lot of central banks into a corner. I mean there's no doubt within the UK that we are seeing, we have seen a softening picture within the economy house prices are at falling floor three months in a row. I think that the consumer sentiment and consumer activities softened and zoomed out considerably. But I think most analysts were really expecting the Bank of England to start their interest rate cutting cycle towards the, at the start of next year. So to see the move this early does suggest that the credit market impact is, was a big factor.
It's one of the reasons that perhaps brought it forward a little bit.
Definitely, I mean , I think you can't discount the impact of the Northern Rock, er, fiasco. The Bank of England was, has been one of the least active in terms of providing liquidity in the face of this credit turmoil so, I think they don't want to give the impression that they weren't sensitive to what was going on in the banking sector.
Now to be proactive . And of course speaking of interest rates, what's gonna happen with the FED next week.
Well, I think a 25 basis point cut is being pretty priced in by the market and analysts have been, increasingly have been talking about a 50, 50 basis point cut. I think if you look at the situation in the US, we are still seeing little evidence from the actual real economy to justify rate cuts. All of these responses are definitely related to the credit market and what's happening within the financial sector. I think if we see a 25 basis point cut from the dollar's point of view because it has been pretty priced in. I don't see that as a dollar negative mood whereas if we do see a 50 basis point cut next week, that could lend a bit of pressure against the dollar.
Notes:
Fiasco: A complete failure
Knee-jerk reaction: an automatic response
