The credit crunch continued to cast a shadow over the money markets. Liquidity, which over the past few months could be described as "patchy" at best, all but seized up completely in September. Banks, unsure of their own exposure to so-called toxic assets and mistrustful of the prospective liabilities of their competitors, continue to hoard cash. Three-month Libor - the interest rate at which banks are willing to lend to each other - soared to hitherto unheard-of levels.Interest rates were held at 5% throughout the reporting period. However, events in the second half of September drastically changed the playing field, and the MPC, in conjunction with a number of central banks around the globe, announced an emergency 0.5% rate cut on 8 October. The move marks an effort to diminish the risk that the escalation of the credit crisis could lead to a severe global recession.Policy makers hope that the move will shore up confidence and help kick-start the markets back into life. Significant further reductions are likely, although the pace will depend on the extent of continuing global financial strains. Another coordinated round 0.5% cuts is quite possible. In any event, SWIP believes we will now see the UK official rate down to 3.5% by the middle of 2009 with that level maintained well into 2010.
187.40p
