The Bank of England is treading a wavering tightrope – will it cut the base-rate from the present 2% to the lowest level ever seen of 1% today?

The balancing act the Bank is juggling here is split between avoiding the UK economy going into a deflationary period and putting further pressure on an already weak pound. The Euro is trading at around €1.10 to the pound having recovered from a low of under €1.05.

The Bank of England might well drop the rate to 1.5% instead of the full 1% cut and we will see later whether this is the case.

It is no surprise that the Bank of England had not understood the depth and severity of the economic problems and how deep the current financial crisis was.

The Bank of England admitted in an interview with Panorama that the bank thought the problem was less serious that it has turned out. Also, Sir John Gieve has told the BBC “that the Bank knew “crazy borrowing” was taking place and the price of houses and other assets was rising unsustainably”

It turns out that the Bank of England admits that it relies too heavily on interest rates to control the economy, but in reality this is all that they have at present. The problem with adjusting interest rates, both up and down, is that they affect the whole economy when in fact there might be other controls or adjustments needed.

It seems to me that the Bank of England need to keep a closer eye and control over the method of lending both between the banks themselves and with their customers. Lending has quite clearing got out of control and the World has become credit dependent, so something needs to change and with the present crisis this will probably happen.

One of the problems that the Bank of England needs to address, in my opinion, is how the banks have been falling over themselves to lend more and more on credit cards. With low and zero rate deals to entice customers to switch balances customers are finding that they end up paying the higher rates when the introductory rate ends.

Official figures from the Office for National Statistics reported this week that UK retail sales rose last month with total sales volume rising by 0.3% in November 2008 and are up by 1.5% from the same time last year.

Sales had been predicted to fall in November and in the same week we see shoppers out in force, so it looks like Christmas might not be as bad as predicted for retailers. However, shops have been discounting their prices heavily and staying open late to entice shoppers in. A survey has also shown that UK consumer confidence has improved for two months running with the reduced VAT rate, lower interest rates and lower petrol prices helping.

Low interest rates in the US

This week also saw the US cut interest rates to below 1% this week and now stand at 0.25%. This was a surprise move, as the rate was expected to be dropped to 0.5%. However, the US Federal Reserve is so concerned about the state of the US economy that it felt the step was necessary. We wait to see what the UK’s Bank of England will do next month with UK interest rates.

Major fraud hits banks and investors at a bad time

HSBC has emerged as one of the worst hit by alleged $50 billion (£33.5 billion) fraud by Bernard Madoffs at a time when banks and investors are already struggling to cope with the credit crunch. It amazes me that financial systems and controls can allow this sort on situation to arise in the first place. It just shows that world governments need to review their financial controls with what has happened in the banking sector and their abuse of sub-prime loans and with this recent alleged fraud.

Credit to remain tight until 2010

John Varley, Barclays Bank head, has told the BBC that although credit remains available to households and businesses, the amount is shrinking. He has also said that both consumers and businesses will continue to find it difficult to obtain credit for until up to 2010. During this period the amount of debt in the economy will reduce and will be hard on a number of individuals, but will be a necessary process to go through in order to get back to a healthy economy again.

Help for the US car-makers approved

President Bush has approved a US government loan of $17.4 billion (£11.7 billion) to help US car manufacturers General Motors and Chrysler in order to help them survive. However, Barack Obama has urged these carmakers to reform their ways and become more efficient and to “not squander this chance to reform”. However, it is very likely that these firms will be knocking on the Whitehouse door in early 2009, as this is a loan to see them through and to help them avoid immediate collapse.

End of the week saw:
Stock exchanges:
FTSE 100: 4,287
DOW: 8,579
S&P: 887.88
Nikkei: 8,589

Currencies
UK Sterling £ to US Dollar $ 1.49195
UK Sterling £ to Euro € 1.07165
UK Sterling £ to Aus $ 2.18563
US Dollar $ to Euro € 0.718290

Commodities
Nymex Crude oil – $42.94
Gold – $838.70

The US Federal Reserve surprised analysts when they cut rates to 0.25% instead of the predicted 0.5% and as a result the US Dollar fell against other currencies.

It could be possible to see these low rates in the UK as well, with the Bank of England cutting rates to 2% earlier this month and considering cutting them further in the minutes of that same meeting. It will be interesting to see where rates will go next and I will certainly be looking on with interest at next months Bank of England meeting.

Inflation in the US saw a record fall of 1.7% bringing the rate down to 1.1%, which has lead the US Fed to cut the interest rate to this all time low. The inflation in the UK is much higher than in the US still sitting at over 4%, but the rate is expected to fall to similar levels as that of America and consequently, our interest rates could fall to similar low levels too.

The administrators of Woolworths have confirmed that all their stores will be closed by 5 January 2009, which is one of the casualties of the present economic crisis. If no part of the business can be sold to the still interested parties, this will add a further 30,000 jobless to the ever increasing unemployment list. The jobless total, which is expected to rise, will in itself continue the downward pressure on the UK market and on inflation giving the Bank of England even more reason to cut rates further.

However, it is worrying and what we don’t want to see is a long period of deflation, which is what Japan saw for a long period. Japan suffered greatly as a result of this deflationary period and their property market took a hit of some 60-75% hit. Property in the UK and across the pond in America has dropped dramatically and is continuing to fall. With interest rates at such low levels, which is where interest rate fell to in Japan, there is the real worry that both the UK and America will go into a deflationary period.

Inflation has been reported to have fallen to 4.1% in November, continuing its fall after peaking at 5.2% and falling to 4.5% in October.

The main causes for the rise in inflation being the rise in commodity and food prices, with oil prices rising to record levels back in July 2008. However, most will have noticed the falls in pump prices of both petrol and diesel with petrol prices in the UK below 80 pence per litre and diesel now falling below £1 per litre.

The governor of the Bank of England has written to the Chancellor saying that the inflation rate could fall below 2% in 2009.

This week saw VAT down to 15%, base-rate down to 2% and oil down to $41.74!

These are supposedly good news for the UK economy, as long as the banks pass on the latest interest rate cut and the oil companies pass on the oil price reduction to the pumps. The Prime Minister, Gordon Brown, has been urging banks to pass on this latest cut, but this is not as easy as it seems in all cases. The Government have tightened the lending criteria and regulations the banks have to follow and the LIBOR rate is still higher than this new base-rate, which is the rate at which banks borrow.

The car industry is looking for bail-out cash

The news has been building on the problems faced by the car industry, with the large US manufacturers knocking at the White-house door for bail-out cash and now UK companies are looking to the government for similar help. Barack Obama has vowed not to let the US car industry collapse, so we could see yet more US treasury funds pumped into ailing businesses.

Vauxhall which is the UK’s largest car manufacturer has admitted that its future depends on the US government bailing out its parent company General Motors, so the impact of what is happening in the US economy will have a major impact on the UK economy yet again. It is being questioned whether the US car industry will survive in the long-term, but in the short-term the bail-out will help keep these companies going.

F1 affected by the credit crunch

Also, Honda have pulled out of F1 racing and have put their Formula One team on the market for sale. Should a buyer not be found by then end of the month then the business will be closed down and Honda BAR will not be racing in the 2009 F1 season.

Sterling under pressure

Good news for UK exporters, as the UK pound falls to an all time low against the Euro, ending the week at just under €1.16 to the Pound. The US Dollar rate was also at a low of just over $1.47 to the Pound. This is of course bad news for travellers and for businesses that import in to the UK and at a time when UK businesses are already under pressure due to the credit crunch.

These low rates of exchange also underlie the weakness in the UK economy and of the problems the British face over the Government borrowing to save the banks. The recent drop in base-rates to 2% has also helped to push the pound down lower.

Oil price at a new low

The oil price per barrel has fallen to $41.74 at the end of the week and could fall lower and Merrill Lynch have even predicted a low of $25 per barrel if China falls into recession. What amazes me though is that it has been reported this week that the state-run oil retailers in India have only just dropped petrol prices for the first time in 22 months by five rupees a litre. Which is the same as the UK’s Bank of England sitting like a rabbit in the headlights of a car and not cutting interest rates soon enough. The cuts they are making now are too late in my opinion.

End of the week saw:
Stock exchanges:
FTSE 100: 4,049
DOW: 8,635
S&P: 876
Nikkei: 7,918

Currencies
UK Sterling £ to US Dollar $ 1.47030
UK Sterling £ to Euro € 1.15959
UK Sterling £ to Aus $ 2.26881
US Dollar $ to Euro € 0.788675

Commodities
Nymex Crude oil – $41.74
Gold – $756.60

The price of crude oil has continued its downward spiral and has now hit a low that was last seen in early 2005.

It will be interesting to see where the bottom is on the oil price and I will admit that I thought this had been reached at the $50-55 price. However, Merrill Lynch has reported that the price could fall as low as $25 per barrel if the global recession extends to China. Demand for oil has fallen dramatically with most of the major economies falling into recession including the US, the UK, Japan and the Eurozone.

The leaders of all major world economies are trying to stimulate growth and are trying to put confidence back into the system and in particular the banking system. With the UK’s Bank of England drop in interest rates to 2% on Thursday of this week and the US Treasury dropping their bank rate to 1% and the Eurozone to 2.5%.

Again, I call for small businesses to report how they are doing and what trades are being most affected by this down-turn. We see the headlines in the news about household named businesses such as Woolworths and MFI both going into receivership, but it is the small businesses that make up the majority of the world economies and it would be good to get feedback on where things stand.

The Bank of England has cut UK base rate to 2% from 3%, which is the lowest it has been since 1951.

This is great for the UK with what is going on, but will only be good for consumers and businesses if this latest interest rate-cut is passed on. Gordon Brown has urged banks to pass on this latest cut to their borrowers so that both home owners and businesses can reap the benefit of the Bank of England’s intention.

This is a big per cent cut in absolute terms and represents a “One Third” reduction from what rates were beforehand and is very encouraging.

Only time will tell whether this bold move will help the UK economy!

This week saw Citibank announce 52,000 job losses after reporting a £13.3 billion loss and 10,000 of those will be in London.

The world stock markets saw another turbulent week with the London FTSE 100 down by 10.6% this week and the Dow Jones by 5.3%, although the Dow was saved at the end of the week by a rally on Friday of 6.5% on the news of Barack Obama appointing his treasury secretary Timothy Geithner.

Do you fancy buying a household name for just £1!

This is the price that restructuring specialists Hilco were prepared to pay for Woolworths this week, as we see another household name in trouble. Woolworths is in discussion with its banks to avoid going into receivership after suffering huge losses with first quarter losses extending to over £90 million. Woolworths has been struggling for some time, but with recent economic events and a further downturn on the high street the company has arrived at a tipping point!

Tax cuts now for tax rises in the future!

The UK’s Chancellor, Alistair Darling, is about to announce his tax cutting and public spending increasing budget in order to boost the UK economy. Mr Darling is looking at spending his way out of economic gloom, but the tax cuts will be short-lived and with Government borrowing at extremely high levels and having risen by a further £1.4 billion in October.

Bucking the high street trend

There are two companies that have bucked the trend this week with Mothercare reporting a doubling on profits this week to £9.5 million over the same period last year and GAP have increased net income to $246 million, up from $238 million last year. GAP’s sales were down by 8% though and the net position was improved due to a cost cutting exercise.

Oil remains volatile

The barrel price of oil remains turbulent this week with the price dropping below $50 a barrel this week for the first time since 2005. Opec are looking to make further cuts in oil production in order to shore up the barrel price, as Opec member oil producers are feeling the pinch after seeing the price of oil fall by nearly 66%.

Inflation on its way down

This week saw some good news on the inflation front from the UK after it fell by more than expected to 4.5% from a high of 5.2%. The Bank of England have hinted at further interest rate cuts to the UK’s base rate though and Treasury Select Committee chairman, John McFall has said that banks must start lending or face nationalisation.

End of the week saw:
Stock exchanges:
FTSE 100: 3,781
DOW: 8,046
S&P: 800
Nikkei: 7,911

Currencies
UK Sterling £ to US Dollar $ 1.48129
UK Sterling £ to Euro € 1.18366
UK Sterling £ to Aus $ 2.36933
US Dollar $ to Euro € 0.799070

Commodities
Nymex Crude oil – $50.29
Gold – $801.80

It’s official, UK inflation is falling and in October the rate fell to 4.5% having hit 5.2% in October.

We have seen that oil prices have been falling dramatically, with Nymex Crude sitting at just over $52 a barrel despite Opec reducing production to try to keep the price high. The fall in oil price has been filtering through to the economy lowering transport costs and with food prices falling too inflation has fallen.

There is however talk about the possibility of “deflation”, however, this is probably a bit premature with inflation still about 4%. The Bank of England has hinted at further interest rate cuts and there is a possibility that rates could fall to 2% by early next year.

The UK is not the only country with falling inflation and lower consumer confidence, the US has seen record falls in consumer prices when it dropped by 1% in October. This compares to a lower than expected fall in the UK where retail sales fell by just 0.1% in October, which is lower than the expected 1%. Retailers are having a hard time and are competing by discounting their prices!

The latest slow-down figures have again hit world stock markets with the Dow Jones falling by just over 5% and Japan’s Nikkei falling by just under 6.9%! The London FTSE is presently trading with a fall of just over 2%.

Better news for the property market

According to the Council of Mortgage Lenders (CML) mortgages in October picked up slightly, up by 7% over September.

“CML data shows that gross mortgage lending totalled an estimated £18.7 billion in October, almost 7% higher than what was an admittedly weak £17.5 billion lent in September. The monthly total was 44% lower than gross mortgage lending of £33.4 billion in October 2007″ Per the CML