Mervyn King, the Governor of the Bank of England made it clear this week there would be no radical reductions in interest rates in the UK in 2008. Lost in a storm of nautical analogy, swept by winds from East and West, the Governor suggested policy would be buffeted by deflation from the US credit crunch and inflation from the East. It’s the Chinese eating too much food and using too much oil which appears to be the problem on the one hand, with Ninja lending programmes from the USA the other. RPI inflation is 4% after all and who is to blame for that?. It appears the Governor may have to write to the Chancellor again as inflation (CPI basis ) may trip over the 3% mark. Maybe more than once. So maybe just a little cut in rates in February.
Meanwhile in the USA Bernanke slashed rates by 75 basis points with possible more to come. In nautical terms this is a Yaw ie an erratic deflection from an intended course either momentarily or temporarily. The Fed may know something about a recession which Greenspan doesn’t, or it was a reaction to the French boy who tumbled the markets last week. Or it could have been an anxious move to assist the monolines like Ambac and MBIA in their refinancing. Either way its a yaw to protect markets and that’s always inflationary mid term.