The Europeans really talk a tough game on inflation. In some countries, central banks have indeed raised interest rates this year, including the European Central Bank (ECB), The Bank of England, Swedish Riskbank and The Swiss National Bank. But over the next several months, if not sooner, most European central banks will reverse course and begin easing credit conditions as global economic growth wanes.
Make no mistake about it -- sub-prime has spilled over to Europe in late 2007. Banks are still starving for credit and in my eyes, central banks are undermining their economies by stripping their national banks of credit.
Since August, all signs point to a major credit crisis in short-term commercial paper in Europe. Inter-bank lending arteries still remain largely clogged with the ECB injecting over $500 billion dollars of credit into the financial system since August 9 to stimulate lending. Despite this tirade of cash, Euribor or the Euro Interbank Offered Rate remains well above the ECB’s target at 4.72% currently, barely down from a high of 4.75%. But Libor, or the London Interbank Offered Rate for U.S. dollars has started to ease from a high earlier last month at 5.72% to 5.24% for 90-day money this morning.
The Federal Reserve’s injection of credit since Tuesday after cutting the Fed Funds rate to 4.75% has probably killed-off the commercial paper crisis; but in Europe, central banks must do more to alleviate credit problems and that means lower benchmark interest rates. The Bank of England will be first to cut rates very shortly.
Starting on September 14, Northern Rock, England’s fifth-largest mortgage lender, suffered a run on its deposits with depositors lining up outside the banks’ branches.
Previously, the Bank of England remained vigilant, claiming it would not bail-out speculators. But a run on Northern Rock’s assets this week – the worst run in over 30 years in England, was enough for the Bank of England to relent and announce a bail-out.
Sub-prime has now forced The Fed and eventually, The Bank of England, the ECB and The Bank of Canada to cut lending rates.
Just six weeks ago, Fed boss Bernanke was warning about remaining vigilant on inflation; well, you know how that story ended on Tuesday. Other central banks will follow suit shortly.
As central banks cut interest rates over the next several months, I fully expect gold prices to finally surpass their 1980 highs and crack $850 an ounce and beyond in 2008.
Comments