Interest rate futures bite back at traders
As more and more traders joined the party of investors expecting an immediate reduction of UK and US interest rates to try and stabilise the financial markets, they all got a fair nasty shock today. The Bank of England and the Federal Bank in the US stood firm and decided there was no need to reduce interest rates instead preferring to inject yet more liquidity into the money markets. US, UK and European banks have now put over £50 billion into the money markets over the last few days but the affect has been muted.
As we have mentioned on a number of occasions, we are in a very unique situation in that a reduction in interest rates would not have the traditional impact in the markets of today. What is needed is substantial liquidity to allow the banks to lend and borrow money at reasonable rates, something which should allow them to continue their businesses as normal. This is what has really undone HBOS, the fact that over night rates shot up to 8% against the UK base rate of just 5%.
How long the banks can keep pouring money into the markets remains to be seen, but it cannot go on forever!
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