GBP - Sterling rates were not aggressively as was the case in the US; rather, they were kept on hold at a juncture when the market might have believed that they were heading higher. Even so, the general tightness in money markets has effectively dealt an increase to the wider consumer market, and the effect seems to be filtering through to the housing market. Prices appear to be moderating in most regions. Inflation is still a risk that the Bank of England will be monitoring, but for the immediate short term more rate hikes appear off the agenda.

EUR - In a development echoed in the UK, the ECB changed tack somewhat and decided not to increase its benchmark rate. Previously, a hike had been discounted by the market. The ECB had been on the forefront of providing liquidity to the constrained money market, and it has made it clear that it views seriously its given task of being the lender of last resort. It has made it equally clear that it will not sacrifice its objective of price stability, though, and we won't rule out the possibility of another hike in rate in Europe once (1) money markets are back to normal, and (2) the economy keeps delivering growth.

USD - The main news of the month was the Fed's decision to cut its benchmark rate by 50 basis points. While this would have surprised most observers if they had knowledge of the fact in May or June, by the time of execution it was almost a forgone conclusion. It had become evident to most observers that the money markets had become dysfunctional and were in need of help. The rate cut certainly seems to have helped considerably in the short term, as much through its effect on market sentiment as anything else. Liquidity has improved markedly, and trading in money market instruments has at least resumed, even if the effortless trading of the pre-crisis days has yet to return completely. From an economic point of view, we are not sure at the moment whether or not such an aggressive move might not turn out to be over-stimulatory in the longer term, but the market has certainly taken the view that such concerns can be dealt with at a later stage.

GBP
The tune in the UK money market has not changed much of late. Recent price pressures in consumer price indices, coupled with one of the most resilient housing markets in the global economy, continues to put upward pressure on short-term interest rates. There is little to suggest that the cycle has come to an end, except perhaps the sheer pace of the increases seen to date. We expect the Bank of England to pause of the recent hike, mainly assess the impact of the tighter stance, but also to give the recent hikes time to feed their way into the economy.

EUR
As in the UK, the ECB has taken a firm stance against the perceived price pressures building in that economy. It is now common cause that growth is well entrenched in Europe, after many (including us) were on the sceptical side about the sustainability of the present European growth episode. A recent development of some concern has been the increase, for the first time years, of food prices. This would appear to be the result of some suppliers starting to use food crops in the production of bio-fuels.

USD
In the USA, money markets have not entirely escaped the sub-prime mortgage market's influence. A full-scale repricing of inflation risk was underway when news of a hedge fund collapse broke. In addition, liquidity conditions changed rapidly, with the usual flight to quality taking place and reversing whatever expectations were building in the market for the Fed to hike again this year. Now, we will have to wait with the rest of the market to for the dust to settle on the mortgage market, and focus to return to the more mundane business of interest rate expectations.

With a slightly less cataclysmic view of the mortgage market taking holding in the wider market, the US yield curve started to flatten out somewhat again in March, after the steepening seen in February. To be sure, the housing market could still be the fuel to the fire of a recession in the US economy. At the current juncture, we don't feel sufficiently confident to make that prediction.

It is noteworthy, though, that foreclosure rates in March were touching record levels. In response, the Fed has kept rates in check, and is likely to continue to do so. In a development not entirely unforeseen by ourselves, and entirely discounted by the market, the ECB hiked interest rates by 25 basis points in March. Looking at the shape of the forward curve in Euroland, there does appear to be some possibility of more rate hikes being priced in. A fair degree of scepticism is always advisable when looking at forward curves for advice, but it is at least instructive to note that the market has taken on board the fact that more hikes cannot be ruled out.

The BOE did not raise GBP interest rates in March, instead voting by 7-2 to keep them stable. However, the signs are still that more increases are possible this year. We have mentioned before the continued firmness of house prices as one factor (and March was no exception); additional price pressures elsewhere, while not rampant, may be sufficient to move the BOE away from its holding stance.