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Analysis: Cautious optimism that market is easing at last
Jonathan Prynn and Nicholas Cecil8 Sep 2008
Spirits were lifted in the City today with a rare burst of good news after a year of almost unremitting gloom.
Although few analysts will say that the credit crunch and its knock on effects are anywhere near the end, there is a growing sense of cautious optimism.
The lightening mood was down to stock market euphoria over the rescue of the two biggest US mortgage lenders, Freddie Mac and Fannie Mae, combined with unexpectedly good news on inflation.
The Bank of England is now expected to start cutting its base rate before Christmas, at last easing the load on hard-pressed consumers.
Paul Dale, economist at City forecasts Capital Economics, said: "Overall, today's news will go some way to convincing the Bank of England's Monetary Policy Committee that the greatest threat to the UK is from weakening demand and not rising inflation."
Stock market
The FTSE 100 Index of leading companies roared ahead this morning as a wave of relief swept round the globe in the wake of the US mortgage bail-out.
In the first hour of trading the blue chip index leaped 199.5 points, or four per cent, to 5440.2 before a huge glitch forced trading to be suspended.
The rally was led by the banks on rising hopes that the worst of the credit crunch could soon be over and the easingof fears of a "nuclear" meltdown of the world financial system.
David Buik of City bookmakers BGC Partners said: "There was a great sign of relief and certainly sentiment is a lot better but you have to say if the American government had not done this we could have been looking at five years of recession.
"This is the end of the beginning not the beginning of the end. We still need to be very vigilant."
Mortgages
HSBC, one of the high street's biggest mortgage lenders, carved 0.56 per cent off its two, three and five year fixed rate mortgages.
The rate for its "fees free" range of mortgages comes down from 6.83 per cent to 6.27 per cent from today.
The same range of mortgages with a £799 up front fee comes down 0.46 per cent from 6.43 per cent to 5.97 per cent. There is also a new three-year fixed rate mortgage with a 5.69 per cent rate and an upfront fee of £999. To take advantage of these deals borrowers must have a deposit of at least 10 per cent.
Mortgage experts said the cut was made possible by steep falls in the City's money market interest rates in recent weeks - with the hope of more to come.
Ray Boulger of brokers John Charcol said the rescue of Fannie Mae and Freddie Mac could lead to further easing in the market, making mortgages more available for first-time buyers.
Inflation
Hopes that the rate of inflation may be close to peaking were raised today - thanks to the falling price of oil. Official figures showed that the price of goods leaving factories dropped by 0.6 per cent last month, the steepest monthly decline since 1986. Although the annual rate still stands at 9.7 per cent, it has fallen from the peak of 10.3 per cent last month. The fall was almost entirely due to a 4.8 per cent drop in the price of "petroleum products". There was also a glimmer of hope that food prices may stop their steep climb in the coming months.
Food manufacturers had to pay 3.1 per cent less last month for UK-produced food and 0.6 per cent less for imported food. Globally, harvests have been much better this year than last.
Oil
The weakening of hurricane Ike makes it less likely that it will cause major disruption to oil production and refining in the Gulf of Mexico. The price is expected to continue its fall from its peak of $147 a barrel in July towards $100.
