Thrifty Loans

As the Governor of the Bank of England, Mervyn King, says that people should not expect the level of base rates cuts that have been talked about for 2008, in the United States they are talking about further slashes in their interest rates.

Federal Reserve chairman Ben Bernanke alluded to further interest rate cuts in the Stats as previous cuts have failed to halt the slide in money markets, and further evidence came forth of the continuing meltdown in the US housing market. Mr Bernanke said that he would ‘act in a timely manner, as needed, to support growth’.

The latest report from the National Association of Realtors indicated that home values have plummeted in more US cities than ever before in the last quarter of 2007.

Mr Bernanke made a speech which encouraged traders to consider another 0.5% cut in the interest rates a done deal for 18 March, the date of the next Fed meeting about rates. That would take the rate down to 2.5%, while the UK interest rate is currently more than double that at 5.25%.

The Fed has already aggressively cut the interest rate in recent months, taking it down from 5.75% to its current level of 3%. This pushed the dollar down against a raft of other currencies by about 7% in 2007. This helped to make exports cheaper and made life tougher for those in Europe. The shrinking dollar helped improve US trade figures as its trade deficit reduced by 6.2% to £361bn, the biggest fall since 1992. At the same time exports leapt up by 12% to hit a record of £822bn.

Meanwhile the UK economy is being seen as more fragile. A study by Capital Economics has worked out that a recession similar in size to that in the early 1990s could have a ‘catastrophic impact’ on the public finances. It could push annual borrowing up to £150bn.