UK Mortgage Market to Continue to Suffer
Mervyn King, the governor of the Bank Of England, met with the House of Commons Treasury Committee yesterday and informed them that the £50 billion loan scheme was not deigned to “kick start” the mortgage market. King states that instead the scheme was designed to restore confidence in the UK banking sector which has been facing difficulties due to the lack of credit currently in the markets. This signaled to many that home buyers will continue to face challenging times getting mortgages, this was confirmed as data released by the Bank of England earlier showed that new mortgage approvals fell to 64,000 in March from 72,000 in February, the lowest level since the current statistical series began in 1999. The major issue for the UK economy is that if it is becoming more difficult to borrow money then fewer houses will sell meaning house prices are likely to continue to drop and this would only go to damage the UK economy further weakening Sterling.
During his meeting yesterday Mr King also had to field questions about whether the main measure of inflation, Consumer Price Index (CPI), which the Monetary Policy Committee uses as a target for setting interest rates, accurately reflected the rising housing costs faced by homeowners. Mr King said a change in how CPI was measured would be "desirable". "I would like to see CPI include house prices in some form," he told the committee of MPs. The measure does not currently include mortgage costs, but does include rental prices. Many analysts believe that current headline figures do not show the full picture and were house prices to be included the figure would actually be considerably higher. The Monetary Policy Committee (MPC) may well hope that inflation figures are not amended as they are currently having to balance high inflation with limited credit and so if inflation figures are amended and suddenly show it is running considerably higher their job will become considerably more difficult.
HBOS Share Sale
HBOS yesterday announced plans to raise an extra £4bn of funding from its existing shareholders of which it has more than 2 million. The bank said it was planning for "a more challenging environment ahead" adding that it was preparing to write off £2.8 billion from the value of investments following the problems caused by the global credit crunch. In a similar move last week, The Royal Bank of Scotland announced it was planning to raise £12bn through selling shares.
This could be seen in two ways, either the banks believe that they can get out of this trouble on their own and do not need any assistance or they are simply not getting enough assistance from the Bank of England. However, with £2.8 billion being written off by one of the UK’s largest banks it does not strike a positive note for the UK economy and as it appears that bad news for the UK is being released on almost a daily basis it may be worth speaking to your account manager today to discuss your requirements and the options available to you.
Fed Rate Decision Today
Across the pond the US central bank, The Federal Reserve is widely expected to cut interest rates by a quarter of a percent to 2% to help the troubled US economy which according to some analysts has begun to shrink. The Fed have been cutting rates on one occasion between its official meetings to reduce them from the peak last summer of 5.25% down to 2.25%. In the States yesterday it was also announced that confidence in the American economy is at a five year low and house prices have fallen by 12.7% in the previous month possibly further sign that the Fed will cut rates one more time to help boost the economy. The Consumer Confidence Index is a good indicator of future consumer spending which makes up as bulk of the US economic activity therefore if the reading is low then it could sign a need for an interest rate cut, hence the expectation for the cut to occur today.
However, with inflation in the US rising this could be the last rate cut in the States for some time. The Fed faces a very similar balancing act as the Bank of England of helping banks increase the liquidity in the market and to keep a lid on spiraling inflation. With the cost of food and utility bills increasing and with a report yesterday from Opec stating they believe oil could keep rising to the $200 a barrel marker, we could see inflation continue to rise making the interest rate setting even more challenging for the central banks. "We expect this to be the last cut, but the Fed will be flexible in responding to economic conditions," said Peter Berezin, global economist at Goldman Sachs
As many of our regular readers will be aware a drop in interest rates usually signals a weakening in that country’s currency. Therefore, should we see a cut in rates in America today we could see an improvement in the rates against the greenback although if this is the last cut in rates as suggested then we may be at the best rates against the US dollar we could see for some time. Therefore, it may be worth speaking to your account manager today to make the most of the current trading levels.
In Other News…
A British satirist has translated 15 of Shakespeare's classic plays into chav speak! Mr Baum’s version of Romeo and Juliet sets the scene for the star-crossed lovers with: "Verona was de turf of de feuding Montagues and de Capulet families and coz they was always brawling and stuff, de prince of Verona told them to cool it or else they was gonna get well mashed if they carried on larging it with each other."
If the Bard was living today, Mr Baum writes on his website, he would "still be writing in the Globe turf, getting loads of respect from the Stratford-upon-Avon massive and producing works of pure genius."
If you thinking of moving away from a country where literacy brilliance is turned into chav speak then why not take a look at www.propertyline.co.uk where you can find your dream home in the sun and then contact Foreign Currency Direct to assist you with your currency needs INNIT!
If you have any questions regarding this report, or wish to discuss an upcoming requirement with an experienced broker that will talk on your level, please email me at djw@currencies.co.uk providing a telephone number and i will get in touch straight away.
Have a great day and thanks for reading!
Daniel Wright
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