A sharp dose of Asian 'flu does us good
Sunday 02 November 1997
Moreover, UK householders could be the first to benefit if the Bank of England - set to be the first major central bank to make an official statement on monetary policy since the Hong Kong turmoil began - holds off on a rate increase when it meets this week.
With Hong Kong's Hang Seng index dropping 30 per cent in the past month, triggering global stock market declines, investors have been flooding into government bonds. They are betting that a slowdown in economic growth in Asia, as slumping stocks prevent companies from funding investment plans, will dampen global inflation. Slower growth in Asia is great news for world bonds, whose interest payment values are eroded by inflation, but bad news for the companies that depend on Asian sales for their profits.
The tumble in benchmark US and European stock indices in the past month - 6 per cent off the Dow Jones Index and almost 10 per cent off the FT- SE 100 - is likely to make central bankers think twice before risking a renewed stock market rout by increasing borrowing costs. And that is likely to be good news for western consumers.
US Federal Reserve chairman, Alan Greenspan, last week reinforced expectations that interest rates won't rise in the world's largest economy, saying inflation remains in check and shares prices are "less out of line" after the fall in the Dow Jones, the bellwether for world stock markets. The Fed next meets to discuss monetary policy on 12 November.
It's the Bank of England, however, that gets the first chance to signal whether slumping stocks mean a reduced need for rate increases. The result of the Bank's two-day deliberations is slated for release at midday on Thursday, just before the Bundesbank usually reveals the results of its regular policy debate.
Mervyn King, deputy governor of the Bank, said last week that the recent slump in share prices is "clearly an important component" in the central bank's discussions about monetary policy. "It's something we'll discuss at length," he said.
Investors reckon officials who have seen banner headlines predicting stock market meltdown 10 years after the 1987 crash would have a tough time voting to raise rates. "If equity markets are still bouncing around all over the place, the Bank of England is likely to decide to leave rates alone in November and have another look in December," said Roy Adams, manager at QBE International.
UK base rates, currently 7 per cent, have been left on hold for the past two months after four consecutive quarter-point increases since May. According to a Bloomberg News survey of 19 economists, 10 see UK rates reaching 7.25 per cent by year-end - the same result as polls taken earlier in October. Those previous polls, however, had most economists pointing to a rise at this week's meeting - now, as stock markets turn tail, they're pushing back expectations by a month.
"If it hadn't been for the stock market instability, the Bank of England would have raised rates this week," said Ian Amstad, senior economist at Bankers Trust. "They will now prefer to take a low profile until things calm down, but will probably move in December."
In Europe, falls of more than 10 per cent in French and German stocks in the past month are also likely to give central bankers there pause for thought. The prospect of yet another crippling strike by French lorry drivers seeking better employment conditions is also likely to make the Banque de France think twice before it risks incurring the wrath of its political masters by raising rates again.
Government bond markets look set to extend recent gains in this environment. If money continues to be switched from equities, global inflation looks likely to stay low and central bankers sit on their hands, yields on mainstream bonds are likely to be underpinned.
However, more risky debt, including corporate bonds and emerging market securities, has been shunned. Fund managers don't want to increase the risk profile of their portfolios at a time when stocks are sinking and every day seems to bring a new crisis in Asia's markets. "The money's all moving to government bonds," said Mr Adams at QBE. "Nice, plain vanilla issue like gilts, Treasuries and bunds."
As well as wanting to keep the FT-SE index on an even keel, the members of the UK monetary policy committee were given an economic excuse last week to keep a check on their rate-rise inclinations for a third successive month. Nationwide building society, Britain's fourth-largest mortgage lender, said UK house prices rose just 0.2 per cent in October, the lowest monthly rise this year, as more homeowners moved to put their properties on the market. The price rise was down from 1.7 per cent in September, and was accompanied by a drop in the annual rate of house price increase to 12.2 per cent from 12.9 per cent.
While the cries of "recession risk" with which some economists greeted UK rate increases earlier in year have abated, the twin considerations of rocky stock markets and a slowdown in the UK housing market recovery might be enough to persuade the Bank of England's panel to leave rates on hold. It all suggests that a sharp dose of Asian 'flu can actually be good for you
q With reporting by Tom Rainsford.
Copyright: IOS & Bloomberg
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Weather bomb in pictures: Storms cuts power for tens of thousands – and snow is on the way
Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
Russell Brand was rendered speechless on Question Time by this man
Fury at Airbus after it hints the super-jumbo may be mothballed
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Shock poll shows voters believe Ukip is to the left of the Tories
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...