Muted response to bank recapitalisation (Oct 08)

The historic measures announced by the UK government and policymakers around the world appear to have avoided a full-scale financial meltdown. But the response of the markets has been fairly muted, with interbank interest rates so far falling only modestly. What’s more, the measures will not prevent the UK economy from enduring a long and painful 1990s-style recession. At the same time, inflation fears may soon give way to deflation fears. We think that by this time next year UK interest rates will have fallen to 2.5%, if not below. This suggests that bond yields and market interest rate expectations have much further to fall.