A sharp dose of Asian 'flu does us good

As the shock waves from the collapse of Asian stocks reverberate around the world, consumers in Europe and the US may have cause to thank the traders who've been beating up Hong Kong stocks. Crumbling stock prices might just persuade the world's central banks not to raise interest rates in the months ahead.

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

News
Shoppers at Selfridges department store in central London
news

News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleFormer Newsnight presenter is being touted for a brand new role
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
PROMOTED VIDEO
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game