Archive for November, 2011

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UK Economic Comment – November/December 2011

In Uncategorized on November 25, 2011 by treasuryconsultancy Tagged: , , , ,

3 month £ rate:1.03263 (0.98169 Oct 11)  (0.7575 Dec 10) (0.605 Dec 09)

6 month £ rate:  1.33031 (1.25969 Oct 11) (1.05125 Dec 10) (0.97313 Dec 09)

Repo (Base) Rate: 0.5% reduced from 1.0% on 5th March 2009

 

£/$       1.5484 (1.5956 Oct 11) (1.539 Dec 10)  (1.6378 Nov 09) (1.4920 Dec 08)

$/euro  1.3269 (1.3884 (1.4162 Oct 11) (1.328 Dec 10) (1.4818 Nov 09)  (1.2872 Dec 08)

£/euro  1.1670 (1.1492 Oct 11) (1.1587 Dec 10)  (1.1054 Nov 09) (1.1587 Dec 08)

(£/euro  0.8570 (0.7802 Oct 11) (0.863 Dec 10)  (0.946 Nov 09) (0.863 Dec 08) )

Economic Events, Interest Rates and Inflation

The optimism and idealism at the end of the 20th century has been overtaken by the brutal realism of the new decade

The shock news that hit the markets last week was that German Bond Auction had only been able to sell two thirds of the €6bn that they wanted to sell. There were various reasons (excuses) given for this but whatever the reason, it probably means that investors – banks and longer term institutional investors are having second thoughts about buying such low yielding bonds when there are so many uncertainties surrounding the euro.

Since last month, Greek 10 Year Sovereign Bonds are now yielding 28.77%  up from 25.17%  in October. German Bonds yield just 2.25% (2.12%), Portugal 13.32% (12.61%), Spain 6.71% (5.55%), Italy 7.37% (5.95%) and UK 2.2% (2.56%).

That the UK can borrow at even lower rates, along with Switzerland, Sweden, Japan and the US is of only short term benefit, as it underlines the extreme stress in the international financial system.

Although the bureaucracy within the euro area makes it difficult for them to take decisions quickly, there are still no clear plans to allow Greece and other countries facing problems, to escape from the euro, so one alternative is for the deficits to be financed by the European Central Bank (ECB). The most extreme solution is a breakdown of the current democratic system in Greece – but it is not possible to see how likely that might be.

In the UK we have different problems with the consumers sitting on their hands and signs that retail spending in the next 4 weeks is going to be much weaker than last year.    Another poor set of corporate results seems probable – especially from the weaker retailers.

One additional to note is that the Sterling  has strengthened against the Euro, although it is still much weaker than the period up to 2008, when it was higher because UK interest rates were much higher than in the Euro countries. Against the USD it is comparatively weak, dragged down by the link to the Euro. This is important because a strong Dollar means higher import costs including energy (oil & gas) food and electronics, which could give inflation an unpleasant boost.

 

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