MPC takes a bold step (Nov 08)

The historic 150 basis point cut in interest rates in November shows that the MPC is facing up to the seriousness of the situation. And it is encouraging that three month LIBOR has fallen sharply in response. But much more work needs to be done. We now think that GDP will fall by around 1.5% next year and a further 1% in 2010, making this recession worse than that seen in the early 1990s. And with inflation fears giving way to deflation fears, we think that the MPC will continue to cut interest rates aggressively, taking them down to at least 1%. This suggests that the recent rally in short bonds and the latest falls in market interest rate expectations have further to go.