He highlighted the announcements made last Thursday evening by Mervyn King and The Chancellor as being particularly positive for the market. Commenting, the senior technical manager at John Charcol said: “Although swap rates have increased a little from Monday’s lows they are still well below the closing levels prior to the speeches. I still expect to see more lenders cut their fixed rates. Libor rates are still edging lower.
“Moodys announced earlier this year they were re-evaluating bank ratings and so these downgrades were largely already factored into the market.
“The main issue is likely to be that those institutions which slavishly use ratings as a means of determining which banks they can place money on deposit with, or what limits they have for dealings with the banks, will in some cases have to reduce or even eliminate their exposure to certain banks.
“However, all the banks knew this was coming, as of course did The Bank of England, and so have prepared for it. The new measures announced by The Bank should more than compensate, if necessary, for the adverse impact of the ratings downgrade.
“The rating agencies used to be looked on as god by a lot of the market prior to the credit crunch. However, since the very public demonstration of their abysmal failure to understand the dynamics of certain markets, in particular, RMBS, their power to influence the market has significantly waned.
“Instead of warning of possible problems the ratings agencies are now seen as a lagging indicator, and generally follow the market rather than lead it.
“On a broader front I think it would be sensible if those local authorities and other institutions which rely solely on ratings to determine who they can place funds with revised their policy. After all a rating is just the opinion of a small group of people.
“A much more sensible policy would be to employ someone who these organisations were satisfied was competent enough to make decisions on which banks to deal with, taking account of course of the views of credit reference agencies but not being dictated by them. For organisations which didn’t have that expertise in hand this function could easily be outsourced on a similar basis.”
