US Fed cuts rates to 0.25% could the UK follow their lead

Posted by admin on 17 December, 2008 under Business news | Read the First Comment

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.