Too little, too late as the BoE slashes interest rates

Latest market comment from Paul Niven, Head of Asset Allocation at F&C: "Today saw an unprecedented and larger than expected 150bp cut by the Bank of England (to 3%) and the ECB delivering, as expected, a half point cut to rates (to 3.25%). While the BOE's move was designed to shock markets and to show that they are moving ‘ahead of the curve', the ECB has already begun receiving criticism for a cut which is seen by many as too little, too late.

In the UK, there has clearly been a significant and fundamental reassessment of the outlook for both inflation and growth and, in the accompanying statement, the MPC state that economic conditions here and overseas have materially deteriorated in recent months. The weakness coming through from third quarter GDP growth (when the economy shrank by 0.5%) seems likely to intensify as credit conditions remain tight and asset prices are falling rapidly.

Once again, the ECB matched expectations in terms of the magnitude of expected cut but have managed to provoke further criticism of their assessment of the severity of the situation facing the European economies. There was a greater recognition of downside risks to growth but still the committee are focusing on upside risks to inflation and point out that next year's expected fall below the 2% target will be only temporary.

From here, it is likely that the BOE will have attempted to ‘front load' rate cuts and will pause for breath over the next month to assess how credit conditions and economic activity evolve in light of their actions. The ECB will remain in data watching mode also and, given the collapsing activity picture, will likely continue cutting rates in coming months, probably from December.

Where rates finally settle before the low in this cycle remains to be seen but further material cuts will be forthcoming in both the UK and Euroland, with expectations for 2% or lower now becoming entrenched in market expectations. Short rates in the major economic blocs will continue to decline and will remain at low levels for quite some time as we continue to face an extended and deep global recession into 2009. Further cuts in short rates are warranted and will remain a key requirement, amongst a number of other policy tools, to ensure that the multi-year deleveraging process which is now underway in the global economy will prove to be an orderly unwind rather than the downward debt deflation spiral which still threatens to push the global economy over the edge".