On Tuesday American federal interest rates were reduced by 0.5% as America took steps to counter the sub-prime loans crisis which has engulfed America over the last month.Steps are also rapidly being taken in the UK as the Bank of England has announced a 10 billion cash injection into the UK banking sector next week followed by three further weekly injections of cash. 

All week Directors of the major UK banks have been lobbying Mervyn King the Bank of England Governor for reduced terms in order to maintain equilibrium in the market.However, amongst all this news it is being reported that the UK fear of rapidly rising inflation may not be as bad as first believed. 

With the problems in the USA and a slow down in house price inflation in the UK, together with a predicted drop in retail spending is actually keeping inflation where it needs to be.  If this continues there is every possibility that the BoE will reduce interest rates and re-energise the market. 

One concerning factor which is emerging though is a return to the “political factor” which we haven’t really seen in this country since the autonomy of the BoE. Whilst the BoE’s role is to monitor interest rates independently there is a growing feeling, particularly with public concern rising and a general election to be possibly held sometime in the near future that the government is putting pressure on the BoE.  The BoE last night denied this accusation but Mervyn King will appear before the Treasury select committee today to explain the actions the BoE has taken during the current financial crisis. 

"It is my belief that interest rates will remain static in the run up to Christmas with no changes made until a true understanding of the American crisis is known by reviewing the effect on all major banks and lenders not just the obvious i.e. Northern Rock and Barclays. However, if the inflation figures continue to fall we may shortly see a 0.25% cut in UK base rates. Anything lower would truly be an extra Christmas present from ‘The old lady of Threadneedle Street indeed,(but you never know when the old fella with the white beard appears and Gordon is also thinking about his election runway!)"

~ Steve Burnage