One Way Bet
With little fresh data available to the markets, dealers focused on monetary policy issues last week. The Bank decided to hold off from loosening UK monetary policy further and kept Base Rate at 5.25%. The consequence was felt more in the currency rather than the cash market. Sterling gained further support, especially against the Dollar, taking “cable” to over 2.0000. It is possible that the dollar could slip further on the expectation that Fed will cut US rates again in the near future, a move could be brought forward if their announced $100bln injection into the US cash market fails to have a significant impact. Over here the main losers in the sub-prime disaster (UK clearers and a number of major European banks) are keeping cash on their balance sheets for the Q1 end date of March 31st. Consequently deposit rates are again advancing with several institutions feeling it necessary to pay “offer” plus. With Base Rate set to decline again by May at the latest we feel that there are real bargains to be had for deposits placed for over 3-months duration.
Looking to this week, again there is little in the way of UK data to excite the anoraks. February’s producer price index (PPI) numbers are released this morning. Analysts are expecting a slight decline from January’s near record highs. Monthly input prices are expected to fall from 2.6% to 1.5% with output prices declining from 1.0% to 0.5%. The annualised input figures are predicted to come down from 18.9% to 18.2% whilst output prices are scheduled to increase slightly from 5.7% to 5.9%. The main culprits as ever are fuels and commodities; their prices fell slightly last month. Unfortunately the continued weakness in the dollar as reinvigorated investors’ interest with oil posting significant gains in the last 2 weeks. In fact the Brent 3month contract reached a record high $106.54pb last Friday. In many ways, rampant producer prices are academic in that consumers’ incomes will never keep up and equity release is no longer the easy way out. There is only one answer to the UK situation; since fiscal policy will not help (watch the Chancellor squirm on Wednesday) Base Rate will have to be cut further. The only question now is one of timing.