?[B]Weekly Bank Research Center 9-17-07[/B]
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[B] Bank of England to Leave Rates on Hold, Cut in 2008 [/B]
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[/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
In recent days, some UK lenders have raised mortgage rates in response to higher market rates, which will hit homeowners. Further, higher market rates cannot all be passed on to the consumer and profits in the financial sector will be reduced. This is particularly the case for firms most reliant on the wholesale sector for their funds, for example, Northern Rock which received emergency BoE funding on Friday. All in all, markets have come round to our long-held view that UK interest rates have peaked at 5.75% and we expect that the BoE will reduce interest rates next year
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[B] Slower Global Growth in the Next 18 Months will Lower the Oil Price [/B]
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[I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
The turmoil in credit markets has been far deeper than initially thought, spreading across the world and worsening financial conditions. The problem is no longer limited to the sub-prime mortgage market in the US and has introduced significant downside risk to the global economy. That is why we decided to revise down our global growth estimates. At this stage, we see a more pronounced correction in the US, but no outright recession. Our US economists estimate real GDP growth slowing to an annual rate of 2% over the next 18 months, mainly due to the impact of declining home prices on consumer spending and related investment expenditures. However, our new global projections come with a twist. Instead of an across-the-board cut in growth estimates, we expect the rest of the world to show a soft decoupling from the US economy and grow at a robust pace. According to our projections, global output growth will slow from 5% in 2007 to 4.5% next year, compared to our previous growth profile of 4.9% and 4.8%, respectively. But this is still a temporary, mid-cycle slowdown and we expect to see global GDP growth at 4.9% in 2009. With such an outlook for the global economy, oil prices will likely decline from an average of US$67.1 a barrel this year to US$58.8 in 2008 and then increase to US$61.6 in 2009. ?
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[B] Confusion Reigns in Central Bank Realm [/B]
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[I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank [/I]
The Bank of England appears reluctant to provide longer-term liquidity, while the ECB, on the other hand, attempted to pump up the three-month market in the past week. Mean-while, the Fed is aiming to cut the Fed funds rate, while several ECB members appear to be signalling that they would actually rather have hiked at their recent meet-ing. Getting a handle on monetary policy is not at all easy at the moment. But how should one tackle the current liquidity crisis? The British economist and commentator, Walter Bagehot, argued in the 19th century for resolving li-quidity crises by swiftly and massively flooding the market with all the liquidity the market could soak up against good collateral (whatever that may be, one might add). And this is what the central banks did to begin with in the present crisis. However, this has proved insufficient in the past month, as many of the problems concern terms of one to three months, which is longer than many central bank liquidity operations. Is this too far ahead to provide liquidity? And would one be inviting problems further down the line? Not ac-cording to the ECB (although it already had such long facilities).
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[Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus14092007/$file/WeeklyFocus.pdf)
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[B] Fed to cut next Tuesday, with odds favouring a quarter point reduction [/B]
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
The stage is set for the U.S. Federal Reserve to cut interest rates next Tuesday. The only issue that markets are debating is whether it will be a quarter point or a half point reduction - we are anticipating the former. Recent data releases support the view that the on-going weakness in the U.S. housing market and the fallout from the recent financial turmoil will act to dampen domestic spending. Last Fridays non-farm payrolls report showed a decline in employment in August and a significantly slower pace of job creation in the prior months. This weeks retail sales report revealed a softer-than-expected 0.3% increase in August, and a 0.4% decline after removing auto sales. Measures of consumer confidence have been softening, which is really not a surprise given the hefty media coverage of the U.S. housing woes and financial volatility. So, the question is not whether consumer spending will moderate in the coming quarters, but rather to what extent it slows.
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[B] [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
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[/B] [/B] [I] J-Chart [/I]
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