Expect a Bank of England Surprise Move next week (G023)
Last month we predicted that the odds were in favour of an interest rate cut, which actually occurred. However, Patrios believes the MPC have got it wrong - the reduction was totally insufficient and another is required immediately and it needs to be far more substantial.
The price per barrel of oil has halved, unemployment is rising significantly and the banks are not passing on the interest rate reduction, as the LIBOR rate has remained stubbornly high. Whilst future inflation (as a result of an increase in the money supply and public expenditure) is of some concern, the reality of a significant recession/depression weighs far more on the minds of politicians and financiers.
It is our belief that the Bank of England will make a dramatic move next week to correct their error of last month. We would not be surprised to see a rate reduction of at least 1% and possibly (though it would be brave) as much as 1.5%.
However, this will have only limited effect if the LIBOR rate fails to move at a similar rate (there have been some indications in the past 2 weeks of LIBOR rates slowly reducing though banks are still likely to restrict reductions in order to strengthen their own balance sheets). An additional reduction of 0.5% is also possible in December or more likely January 2009.
From an Associate's Blog
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