Global Central Banks Likely To Cut Rates Even More

As the global recession accelerates, central banks are coordinating efforts to ease monetary policy. Until the financial crisis situation is fully quarantined, the economic paramedics will remain on high alert. As a result, the markets are currently reflecting the following probabilities for interest rate cuts:

FED (U.S.): 100% probability of 50 bps rate cut and 24% probability of 75 bps rate cut by year-end.

BOJ (Japan): 14% probability of 25 bps rate cut year-end.

ECB (Eurozone): 100% probability of 25 bps rate cut and 89% probability of 50 bps rate cut by Jan-15-2009.

BOE (England): 100% probability of 50 bps rate cut and 69% probability of 75 bps rate cut by Jan-08-2008.

BOC (Canada): 100% probability of 50 bps rate cut and 96% probability of 75 bps rate cut by year-end.

RBA (Australia): 100% probability of 75 bps rate cut and 62% probability of 100 bps rate cut by Feb-03-2009.

RBNZ (New Zealand): 100% probability of 50 bps rate cut and 44% probability of 75 bps rate cut by Jan-29-2009.

Summary: The short-term result of this increased liquidity should be a stimulative buffer against further deflation and has continued bullish implications for bonds and the U.S. Dollar as the world’s reserve currency.

However, the long-term impact of all this is inflationary once rates begin to stabilize. Note that this is a secular development and not something that will occur in the short-term. Central banks have all sorts of tricks in their magic box to delay the inevitable, but economic realities/truths will eventually float to surface then just as they have now.

Disclosure: Long US Dollar Bearish ETF (UDN) and Gold Trust ETF [[GLD]].

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