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Your Money > Investing Comment Articles > Unknown unknowns
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By Richard J Hunter, Hargreaves Lansdown
Whilst the market is overwhelmingly convinced that the next UK interest rate move will be down, the question of timing is one which is currently dividing It seems that there is a wide expectation of not just one, but two quarter-point decreases during 2008, which would take the base rate down to 5%. However, in terms of when the first one should come, is there enough evidence for the Monetary Policy Committee to cut rates this week or will they take the Christmas season into account before making a decision on February? Equally, the minutes which follow on from the decision in a couple of weeks' time will be keenly scrutinised for clues as to how the MPC is currently thinking. The real uncertainty at the moment is whether they choose to maintain their stance against inflation and leave rates alone, or whether they choose instead to reduce rates in an effort to kick-start economic activity against a weakening growth trend. Unfortunately, for the markets this added confusion comes hot on the heels of general US economic concerns, with the jury currently out in the US as to whether a recession there is imminent - or, according to one investment house over the last couple of days (although not necessarily a widely held view), the recession has already arrived. As former Defence Secretary Donald Rumsfeld famously observed - "as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know." Perhaps that is the kind of clarity the markets feel they are currently receiving. And herein lies part of the problem. Some of the data that has been coming out of the UK has been conflicting. At the same time, it has become a preoccupation both sides of the pond to analyse each Central Bank statement, be that oral or written, on a word by word basis to anticipate exactly how they are thinking and what its next move might be. Equally, the decisions are driven by the data it receives and, if this is telling different stories, so it becomes more difficult to be definitive about how the economy stands. Just this week, we have heard that Christmas sales have potentially been the worst for three years (yet to be borne out by the retailers) and yet house prices have just (unexpectedly) rebounded. At the same time, the oil price continues to test record highs, whilst the other inflationary pressure of the increase in food prices remains very much on the radar. And so the circle goes on. In all, these remain difficult times in world markets and investors should remember that investment should be seen over the medium to long term. A number of factors could yet reignite the market - the recent and growing reporting of buying interest from the cash rich Sovereign Wealth Funds could yet prove to be a positive factor during 2008 - but in terms of both the US and the UK economy, those markets are pinning their hopes on some aggressive rate cuts to inject some life into the lethargy which currently seems to be gripping markets. And, as ever, the clarity of the economic data which continues to come through will remain crucial, along with (it would appear) the nuances of the accompanying statement. Useful links: |
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