Liquid Credit
Despite the ongoing, mostly adverse, media coverage we may be over the worst of the “Credit Crunch”. Whilst US house prices recorded the biggest monthly fall on record, the same low prices are tempting buyers back to the market. Here, the Bank has stated it will not stand by whist dealers aggressively (and illegally) short bank stocks; Bear Stearns stock price is edging upwards albeit from a low level. True, UK inter-bank rates have rocketed but this is a reflection of our “liquidity crunch”. Most of the biggest UK and European banks are carrying significant levels of worthless CDO’s and other toxic paper and are writing down their balance sheets accordingly. As Quarter 1 ends today they are hording cash to offset balance sheet write-downs leading to a short supply of cash and forcing market rates upwards. By this time next week we should see market rates 20 to 30 points lower as the big banks lend to the market again.
There were only two significant data releases last week. Firstly the Nationwide Building society reported that house prices fell in March by 0.6% giving an annual increase of only 1.1% - the lowest since March 1996. The Gfk / NOP consumer confidence survey reported misery unseen since 1993 – a negative balance of 19 in March. None of these figures should come as a surprise but they do put the Bank between a rock and a hard place. Cutting Base Rate aggressively could lead to higher inflation later but doing nothing could force the UK into recession by Q3 this year. It appears that Merv has decided to abandon his policy of avoiding moral hazard and is pumping extra liquidity into the market in an attempt to reduce market rates thus allowing banks to lend to consumers at lower levels.
Wednesday sees the release of March’s Bank of England consumer credit, mortgage lending and mortgage approvals figures. They may be just dire enough to persuade the Committee to cut Base Rate by 0.25% on April 10th although the consensus is for May 8th.
30 / Mar / 2008