Thursday, November 5, 2009

Decision Day for central banks

Interest rate decision day in the UK and eurozone. Both are expected to keep interest rates on hold, which on the face of it is good news for mortgage holders in the UK, Spain, Portugal, France etc etc.
The main questions surround the levels of quantitative easing and whether or not there is going to be any more money pumped into the economies.
It seems to be the general feeling that interest rates will remain at the record low levels until the end of 2010.
The weakness of the pound I think is going to cause more concern. If you live in Germany and buy oranges from Spain, the transaction between the companies involved is in euros, and you hand over euros in the shop. Inter-country trading, within the eurozone, has to be far more stable than importing products with a weak sterling.
It's a real conundrum as the way of making the pound more attractive is to have higher interest rates, which makes the pound more attractive as the income on investments is higher. So it would be better to hold sterling than euros. Of course, does higher interest rates further screw up any UK recovery and drive further loan defaults, unemployment, and businesses going bust. Many householders and business owners claim not to have felt any benefit from low rates, because finance isn't available. Tricky.........

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