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Investec predicts further US interest rate drops by year-end

Investec Asset Management is predicting that the US Federal Reserve will follow through with easing in the Fed Funds rate of at least 50 basis points before the end of 2007.

Head of currency Thanos Papasavvas says: “The Federal Reserve has tried to differentiate between the liquidity problems in the money market, which it has addressed with a technical 50 basis point cut in the discount rate and associated widening of eligible collateral, and the wider state of the economy as a whole. Nevertheless, it has not let its concerns over moral hazard issues prevent it from acknowledging the growing risks to the real economic outlook.

“On balance, we expect the Fed to follow through with a ‘helping hand’ easing in the Fed Funds rate of at least 50 basis points before the end of the year, which should help to underpin growth going forward. Indeed, by the middle of next year, the economy may well be back on the Fed’s original trajectory of trend-like growth, which would allow this temporary monetary support to be withdrawn.”

Papasavvas adds that in the UK, recent developments have led him to believe that the Monetary Policy Committee will not raise interest rates further before year-end.

He says: “We are following the recent developments of the banking crisis closely as it may lead to a surprise cut in interest rates if the developments in the US worsen.”

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