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UK gilts yields fall below 1% for the first time ever

The key gilt yields in the UK market have today fallen below 1% for the first time in history. This is the debt market which allows the government to raise money from investors by promising to pay a fixed income with a predetermined redemption date. This move to under 1% reflects the ever-growing assumption that UK base rates are set to fall to around 0% in the short term. The banking system is in danger of grinding to a halt in the meantime as finance is held back prior to the expected sharp reduction in base rates.

In many ways the UK government has itself to blame by indicating that rates would fall to 0% and then doing nothing about it for some time. A similar move in the US has also paved away for the UK government to follow suit and many are forecasting a change in the first few weeks of 2009. So what will this mean to the UK economy?

By reducing interest rates to near 0% this should also reduce finance costs for the consumer and business markets at a time when improved cash flow and additional funding is required. The hope is that this will help to refloat the UK economy although time will tell.

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