Cutting Interest Rates - It Will Either Work, Or It Won't

Originally published on 13 Janaury 2009

By Andrew Merricks Head of Investments, Skerritt Wealth Management

2008 will go down as probably the most momentous year in financial history. 2009 will be the year that we find out whether our World leaders have created kill or cure for our woes. It is quite incredible that just a few months after the Bank of England was being criticised for allowing inflation to surge above 5%, and for failing to raise interest rates quickly enough to curb the threat that this was bringing, the expectation now is that they will follow the Federal Reserve in the US and the Bank of Japan by cutting rates to close to zero as a monetary defibrillator for the faltering global heartbeat. Putting it bluntly, the short term printing of money will either work – or it won't. No one, at this stage, knows. If it works in the short term, we can expect that the inflationary flames will have been well and truly fanned within the next couple of years or so. At the moment investors are happy to buy Government Bonds and yields have dropped accordingly. This could reverse very rapidly if inflation is let out of the bag and you would not want to be caught in the rush out of Treasuries if that happens. If...