Financial Betting Articles

Decisions, decisions

Last week saw the markets trundle up to pre-crisis levels, showing more optimism than a Derby County fan talking about European qualification. The credit crisis should have clouded the economic outlook with uncertainty but markets are strutting ever forward proclaiming Donald Pleasance’s immortal words “I can see perfectly!” – but I wouldn’t be surprised if the markets fall flat on their faces before performing any kind of ‘Great Escape’.

. The bigger picture hinges on what the Bank of England and the ECB do with interest rates on Thursday. Merv King has dropped his ‘steady hand on the tiller’ approach and started throwing his weight (and the Bank’s money) around in the wake of the Northern Rock debacle. Is he going to loosen the economy’s interest rate belt in much the same way he loosens his own belt after another gluttonous lunch at the Royal Exchange?

The US did it and the markets have reacted positively both sides of the Atlantic. But is it wise? Loose monetary policy after the 1987 crash led to run-away inflation and the same tactic helped fill the dotcom bubble in the late 90s and early 00s. A panic cut when the prevailing economic data doesn’t warrant it would be less welcome than a stripper at a church Sunday social.

Retail sales, money supply and new mortgages are all going along fine thank you very much. The global economy is tickedy-boo and this is bumping up commodity prices. No cause for concern there then. The UK housing market is obviously the key to any rate decision. Sub-prime fall-out is sure to do some damage here particularly with the recent revelations that self-certified mortgages (“If you want a huge mortgage, no questions asked, please tick here”) have been abused and the buy-to-let market is more bloated than 1970s Elvis.

One view is that the problems in the housing market should be allowed to right themselves – as elsewhere in the credit crisis, let irresponsible lenders get their fingers burnt and they will be more cautious in future. A degree of contraction is probably healthy and slower growth is better than rampant inflation and then recession.

The markets and the economies of Europe and America are at a tipping point – how central banks manage the situation from here on will dictate which way it goes. Take a view on which way it'll tip at www.ChoiceOdds.com

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