Released on: January 28, 2008, 9:33 am

Press Release Author: Jim watson

Industry: Real Estate

Press Release Summary: If a week is a long time in politics, 24 hours seems to have
been a long time in economics. In less than a day the US Federal Reserve has cut its
federal funding rate by 0.75 per cent

Press Release Body: If a week is a long time in politics, 24 hours seems to have
been a long time in economics. In less than a day the US Federal Reserve has cut its
federal funding rate by 0.75 per cent, Bank of England governor Mervyn King has
hinted at a rate cut in February\'s monetary policy committee (MPC) meeting and the
MPC minutes for January have revealed why there was no cut this month.

The action announced across the Atlantic, which may be interpreted as a dramatic bid
to save the US economy from the looming spectre of recession, may have had plenty to
do with the speech Mr King made to a business audience in Bristol. He suggested on
the one hand that the current 5.5 per cent base rate was \"probably bearing down on
demand\", which could be taken as a strong hint that he favours reducing it to 5.25
per cent next month. But - in a possible reaction to events in Washington - he also
emphasised that the job of putting an economy back on track was not just the job of
a central bank. \"It is important that everyone understands the limits to the ability
of central banks to smooth the economy,\" he stated.

Mr King gave two reasons for saying this. Partly it was because banks and markets
had \"necessary\" adjustments to make themselves to get the economy back onto an even
keel. The other reason was the danger of inflation, which the governor said could
force consumer prices index inflation high enough for him to need to explain himself
in an open letter to the chancellor more than once.

The potential inflationary pressures have to constrain interest rate policy - with
all the market implications this has for property investment and house prices - were
made clear today when the MPC minutes were published. Far from the decision on
interest rates being a close one, nobody apart from arch-dove David Blanchflower
voted for a cut. The minutes stated that \"the short-term inflation outlook had
worsened markedly\", with the pressures of rising food, oil and domestic fuel prices
all major concerns.

Yet this does not mean there will be no February rate cut. For one, the minutes
noted tat next month the latest inflation projections will be to hand, potentially
enabling the step of interest rate reduction to be taken with a clearer picture of
future prospects. The chief economist at Investec Securities, Philip Shaw, said
there should still be a cut next month.

However, Mr Shaw added, \"barring a sudden deterioration in the growth outlook the
MPC is unlikely to act aggressively\". The suggestion that this might happen, as the
MPC admitted considering in December and Royal London Asset Management economist Ian
Kernohan recently said was possible next month, may have receded.

Thus those looking for a boost to the property market through lower interest rates
may get at least some of what they wish for on February 7th. But there is no
indication that the radical move undertaken by the Federal Reserve is about to be
copied here.

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