These are % rates for the end of period

The world remains on track for a moderate economic recovery. The US economy probably grew by around 4% in the third quarter (the first estimate of Q3 GDP is released at the end of October). Consumer spending is being supported by 5% growth in real after-tax incomes and by record low mortgage rates. Housing market strength is helping to offset equity market weakness. Durable goods orders - a key indicator of capital spending - are also recovering. The index of leading indicators and the purchasing managers' surveys have weakened but are still consistent with US GDP growth of 2-3% in the fourth quarter. Europe (ex-Germany) is recovering, the UK is strong and Japan has at least stabilised with some signs of progress on financial sector reform.

Debt remains a valid concern, but US household and corporate balance sheets have been adjusting gradually and we expect this to continue. Bank lending criteria have already been substantially tightened in the last two years. In our central scenario the Fed will therefore want to return interest rates to more normal levels of 3-3.5% by the end of 2003. This would of course still be a low level by historical standards.

In the near-term the main risks to growth and interest rates are clearly on the downside. These include a crisis in the global financial system such as a major bank failure, a more painful correction of the imbalances in the US economy, or a prolonged crisis in the Middle East. Market sentiment is clearly fragile and it is very hard to see rates rising until the uncertainties over Iraq begin to diminish. We should also be alert to the possibility of a cut in US interest rates at the next FOMC meeting on 6th November if the October labour market and/or ISM surveys are unexpectedly weak. The Bank of England and the ECB would probably match such a move. The weakness of the German economy means that the ECB is the most likely to cut interest rates independently.

Expect rates in Hong Kong and Singapore to stay low. Growth is still weak and there is no domestic case for higher rates, although the exchange rate peg in Hong Kong means that rates there will eventually follow US rates higher.

Gerard Lyons Tel: 44 20 7280 6988
Julian Jessop Tel: 44 20 7280 6690

This document is issued by Standard Chartered Bank (SCB). While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only and for private circulation. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. Any investments discussed may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. SCB, and/or a connected company, may have a position in any of the instruments or currencies mentioned in this document. You are advised to make your own independent judgment with respect to any matter contained herein. In the U.K., SCB conducts designated investment business only with Market Counterparties and Intermediate Customers and this document is directed only at such persons. Other persons should not rely on this document.

Copyright: Standard Chartered Bank 2002.
Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced with permission of an authorised signatory of, Standard Chartered Bank. Copyright in materials created by third parties and the rights under copyright of such parties is hereby acknowledged.
Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests and shall remain at all times copyright of Standard Chartered Bank and should not be reproduced or used except for business purposes on behalf of Standard Chartered Bank or save with the express prior written consent of an authorised signatory of Standard Chartered Bank.

All rights reserved. Standard Chartered Bank 2002