A Very Definite Shift in Emphasis ……

..from the MPC in the statement that followed the announcement of a further 50 basis point cut in UK rates agreed at yesterday's meeting.

At the December get together, at which, you will remember , the decision was made to cut rates by 100 basis points but the discussion was centred on whether this was enough. Yesterday, there was no mention of debate as to the magnitude of cut. This might emerge in the actual minutes to be published on 21st January but for the time being one has to assume that the focus was directed at alternative measures for stimulating the economic revival rather than on the ‘big hammer' of continued interest rate reductions. This makes the 21st release even more important for the market. Sterling had a good day, the Stock Market was less impressed. Interest rates eased a few basis points but given that the 0.50% cut had been priced in already, the reaction was predictably mooted.

Attention now turns to interest rate decisions to be made next week by the ECB and the week after by the Bank of Canada for differing reasons.

Opinion expressed yesterday in certain papers that the ECB might not cut rates because Trichet had given the market no hint that this was likely to occur, now looks pie in the sky. The MPC cut and more importantly, the horrendous data that continues to flow from the Eurozone's major nations, makes a rate cut an absolute necessity. Indeed, it is likely that no matter what the Central bank does, it will be viewed as too little, too late. The Euro might suffer all round in the next week. The only saving grace could be an atrocious US Non-Farm Payrolls figure this afternoon which might enable the Euro to weaken from a stronger starting point.

The situation in Canada is different. Next week's Canadian Trade Figures will confirm that there are few countries less well equipped to weather the growing US economic storm than Canada. There is an urgent requirement for rate cuts however, given that differentials between the US Dollar and the Loonie interest rates have remained constant over the past 12-months (with the CAD weakening) any shift lower in rates will cause the differential to close and thus make the CAD less attractive. How to cut rates without a detrimental effect on the currency ….. difficult.

Today's industrial production figures from the Eurozone are already out and were worse (considerably worse in France's case) than expected and even though the retail sales figures were a little better, the overall view is still negative. As indicated above, this persistent build up of bad news must weigh upon the Euro. From the UK, manufacturing output slumped at its fastest annual pace since the early 1980s and much more than expected in November, this morning's official data showed. The figures indicate that Britain could be heading into a severe downturn and will likely reinforce expectations that interest rates will head towards zero this year. Seperately, producer price inflation figures from the ONS came in stronger than expected in December.