On January 8, 2009, the Bank of England (BOE), dealing with a rapidly deteriorating economy, cut its benchmark interest rate by .5 percent to 1.5 percent. While the move was expected, it is notable as the 1.5 percent rate is the lowest in the bank’s history. Keep in mind, English history is much longer than ours in the United States – the Bank of England has been in operation since 1694. Considering that we often compare financial history in terms of 10-year highs and lows, the BOE’s move should be met with grave concern. How bad does the world economy need to be for a major central bank to drop its rate to a 300+ year low?
Here are a few answers:
Wharton finance professor Franklin Allen “points out that Europe is experiencing a deep recession, especially in the United Kingdom. Germany, Spain and Ireland have also been hit hard, although France is holding up a little better because greater state involvement in the economy is somewhat cushioning citizens from the downturn. Italy, despite long-term structural problems in the economy, is also fairing relatively well at the moment because of low levels of debt.
Europe, he adds, is likely to experience deflation, but will keep interest rates at 1.5% or 2%, while the United Kingdom will be more aggressive and may let rates fall to zero percent or 0.25%. Low rates have advantages and disadvantages, he says: While they help soften the impact of recession, they can delay recovery.
Around the world, emerging markets in Latin America, India and China are still growing, but at lower rates – exposing some underlying problems in their economies.”
[SOURCE: Global Economic Forecast for 2009: Will Demand for Good News Outpace Supply? Knowledge@Wharton, January 7, 2009]
BNP Paribas on the UK’s economy: “Given worsening survey and hard data we have adjusted down our GDP forecast. We now expect GDP to contract by 3% on average during 2009, with a low-point of -3.5% [year-over-year] during Q2-2009. We see virtually zero growth during 2010.
[SOURCE: UK: From Hero to Zero, Allen Clarke, BNP Paribas Daily Economic Spotlight, December 19, 2008]
According to analysts at RGEMonitor, the decline in U.S. exports will accelerate in 2009:
Exports contraction that began in late 2008 will gain pace in 2009 as more and more emerging economies slip into slowdown following the G-7 countries. On the other hand, easing oil prices and secular downward trend in consumer spending and business investment will help imports to shrink. In fact, this might cause the trade deficit to contract in 1H 2009 since the contraction in imports might well exceed the decline in exports, thus containing any negative contribution of trade to GDP growth.
[SOURCE: RGE Monitor - 2009 U.S. Economic Outlook, Christian Menegatti, Arpitha Bykere, Elisa Parisi-Capone and Mikka Pineda, January 7, 2009, RGEMonitor.com]
Gregg D. Killoren
victoria1014
