Bank of England must ‘wake up’ and slash rates by 1 per cent

The Bank of England must jettison its usual caution and slash interest rates by 1 per cent to bolster the UK banking system and boost investor confidence, says Argonaut European Income fund manager Oliver Russ.

Russ says the Bank of England must ‘wake up’ and cut rates as soon as possible in order to de-stress the financial system and housing market, and help shore up UK banks, which he believes are among those most under threat from the liquidity crunch triggered by the US sub-prime crisis.

He argues that both the BoE and US Federal Reserve should cut their respective rates by 0.5 per cent in December and by at least a further 0.25 per cent in January, or face a worsening crisis and, in the case of the US at least, a probable recession.

If the US does slide into recession – something Russ believes the country would be ‘very lucky’ to avoid – he argues that the knock-on effect would be particularly damaging to economically sensitive sectors such as materials and resources.

Russ, however, believes that a downgrading of growth expectations could benefit investors in interest rate sensitive areas, particularly high yielding stocks such as utilities and telecoms. He also points out that most of Continental Europe is in far better fundamental shape than the UK and Ireland, with much lower debt levels leading to less sensitivity to rates.

Nonetheless, he does not expect the Bank of England to cut rates as quickly and as aggressively as he believes it should, comparing its inaction with the decisiveness of the US Federal Reserve and European Central Bank in the initial throes of the crisis.
He says: “The Bank of England is behaving like the British Governor in Carry On Up The Khyber, who when asked for his response to a crisis replies ‘We’re British – we won’t do anything.

“Confidence could return swiftly but it depends on the Fed and BoE, which need to cut rates hard and fast to unblock the credit system. UK rates are very high by international standards, and the BoE needs to wake up and start cutting. In my view, UK rates need to come down by 1 per cent as soon as possible. This would enable the excesses that have built up in the economy to be gradually worked off, rather than undergo a painful and sudden readjustment.

“Even the Bank agrees that cuts might be required, but stated in its minutes that a cut now might look like a panic measure. They should be more concerned with economic reality, not PR.”