Interest rate decisions bring no relief

Markets did not find relief in interest rate cuts today neither from the Bank of England nor from the European Central Bank, with both banks keeping rates on hold.

Despite the continued turmoil in the money markets, both sets of central bankers are likely to demand further confirmation of economic slowdown in their respective economies before following the more active intervention shown by the Federal Reserve, according to Paul Niven, Head of Asset Allocation for F&C.

In Europe, after postponing a 25 basis point hike in September due to tensions in the credit markets, rates have remained at 4%, with the ECB on 'pause' with regards to interest rate policy.

"The recent jump in inflation continues to concern the hawks, whilst the appreciation of the Euro and the prolonged liquidity crunch are likely have the ECB divided, and should lead to stable rates for the remainder of the year," he said.

"In the UK, where interest rates remain unchanged at 5.75%, pressure will continue to build for an interest rate cut. However, we believe further evidence of economic slowdown in the UK is needed before this develops into positive action. This will likely materialise in the first quarter of next year," Niven added.

According to Niven, with uncertainty in financial markets remaining high, central bankers' comments will again be closely scrutinised, as investors attempt to predict a turnaround in European monetary policy. And in the US, Fed Chairman Ben Bernanke's comments in his testimony to the US congress, which are set to take place later today, should shed some light on the Federal Reserve's concerns and rationale for last week's 25 basis point cut. "For the time being, the US Federal Reserve is the one leading the way in cutting interest rates but with cracks appearing in the previously benign economic outlook, it is now only a matter of time before the other major central banks follow," concluded Niven.