The last month has seen a marked deterioration in conditions in global money markets. Interbank interest rates in the UK have hardly responded at all to April’s 25bps cut in official interest rates. In fact, while the repo rate has fallen by 50bps since February, three month LIBOR has risen by 34bps. What’s more, the strains in the money markets are clearly spilling over into the wider economy. As such, the Bank of England is likely soon to announce more initiatives to help solve the problems in the financial markets, while at the same time continue to use monetary policy to protect the wider economy. We think that interest rates will eventually fall to around 3.5%.
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