The
British Economy as with other developed economies entered 2009 in recession
and on the brink of Depression which triggered a series of panic interest
rate cuts all the way to 0.5% by March 2009 and they have stayed there right
into the start of 2010. This in-depth analysis is third in a series of
analysis that seeks to generate accurate forecasts for UK Inflation, GDP
Growth and Interest Rates for 2010 and beyond. The whole analysis and
implications of which will be published as an ebook that I will make
available for FREE, ensure you are subscribed to my always free newsletter to
get the completed scenario in your email in-box.
UK
Interest Rates Forecast 2009 Recap
The
analysis of December 2008 forecast (UK interest rate forecast of early
December 2008) for 2009 that UK interest rates should decline to 1% (from 3%)
by early 2009 and remain there into the second half of 2009.
The UK
base interest rate was cut to 0.5% in March 2009, following which the Bank of
England has continued to pursue an artificial banking system by keeping
interest rates at an extreme historic low of just 0.5% into the end of 2009
so as to flood the bankrupt banks with liquidity to enable them to rebuild
their balance sheets by overcharging customers against the base interest rate
and manipulated interbank market rate of 0.66% against rising real market
interest rates which have been in a steady climb since March 2009 which
increasingly has meant that during 2009 the base interest rate had become
irrelevant to the retail market place.
The
forecast for most of 2009 showed a positive bias of 0.5%, rising to 1% by
year end against the actual UK base rate.
UK CPI
Inflation Analysis and Forecast for 2010
The
in-depth analysis and forecast conclusion for UK inflation for 2010 (http://www.marketoracle.co.uk/Article16085.html)
included the following analysis points and conclusion that built towards the
forecast for UK GDP Growth and Interest rates for 2010 and beyond, therefore
these analysis points are not being repeated in this article.
Inflation
Forecast 2009
The
Inflation Mega-trend
UK
Retail Sales Signal Debt Fuelled Election Consumer Boom
M4
Money Supply Adjusted for the Velocity of Money
UK
Unemployment
Debt
Fuelled Economic Recovery Heading for Double Dip Recession?
Debt
and Liabilities
UK
Interest Rate Being Kept Artificially Low For Bank Profiteering
UK
House Prices Continue 2010 Government Debt Fuelled Election Bounce
UK
Producer Prices
Stocks
Bull Market Signaling Strong EconomyBritish Pound to Wobble Lower During 2010
Conclusion
and UK CPI Inflation Forecast 2010
The
sum of the above and recent analysis is for UK inflation to spike higher in
the coming months during early 2010. This is inline with my view that the
Labour government has succeeded in sparking a strong debt fuelled economic
recovery that will become clearly visible during the first quarter of 2010. I
expect UK inflation as measured by CPI to break above the Bank of England's
upper CPI target of 3% very early in the year, and stay above 3% for most of
the year only coming back below 3% late 2010 as a consequence of the next
governments attempts to bring the unsustainable budget deficit under control.
Higher
inflation implies higher interest rates, especially as the CPI rate is
expected to break above 3% early 2010, which means market interest rates will
continue to trend higher even if the Bank of England continues to keep the
the base interest rate fixed at 0.5% at least into the General Election.
However the 0.5% interest rate policy is not sustainable under the weight of
persistently high inflation (above the BoE's 3% upper limit) and therefore
the pressure for the base interest rate to rise will become intense during
2010.
UK
Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom
The
in-depth analysis and forecast conclusion for UK Economic Growth for 2010 and
beyond(http://www.marketoracle.co.uk/Article16167.html) included the
following analysis points and conclusion that build towards the forecast for
UK Interest rates for 2010, therefore these analysis points are not being
repeated in this article.
Labour's
10 Year Economic Boom Evaporated into an Even Bigger Bust
Stock
Market the Key Indicator of Economic Strength of 2009
Budget
Deficit Cutting Solutions to Britain's Debt Crisis
Bank
of England Quantitative Easing Gilts Market Smoke and Mirrors Dangerous Game
China
Leads the Way for Strong Global Growth 2010 and Beyond
UK
General Election Implications
Mainstream
Press and Think Tank Current UK Growth Forecasts for 2010 UK GDP Growth
Forecast Conclusion
The
sum of the above analysis is for a strong economic recovery into the end of
2010 which given the pessimism today I term as the Stealth Election Boom that
followed the Stealth Bull Market of 2009, the economic 'boom' will continue
in to a peak in Q1 2011, which will be followed by weakness during 2012 and
2013 and strong recovery for 2014, and into a 2015 summer general election,
breaking this trend down into GDP terms for end 2010 +2.8%, 2011 +2.3%, and
taking account of the election cycle preliminary GDP projections for 2012 of
+1.1%, 2013 +1.4%. 2014 + 3.1% with expectation of strong Q1 growth for 2015.
Therefore
I just cannot see this double dip recession that the mainstream press and so
called think tanks are obsessing over at this point in time, no year on year
economic contraction or even a quarter on quarter dip is visible.
The
following graph illustrates my trend forecast for quarterly GDP growth over
the next 2 years 2010 and 2011.
UK
Strong Economic Recovery 2010 +2.8%, Q1 2011 peak of +3.4% (year on year),
2011 End +2.3%. Q4 2009 +0.6%, Q1 2010 +1.1%. Q2 2010 + 1.3% Election Boom.
Q3 2010 +0.9% Q4 2010 +0.6%, NO Double Dip Recession, NO Negative Quarters
for 2010 or 2011..
If the
anticipated strong economic recovery starts to materialise during 2010, then
the Bank of England will view its continuing policy of keeping interest rates
at 0.5% as erroneous and should start to lift interest rates rapidly to
levels far above today's consensus view emanating out of the mainstream press
that UK interest rates will be kept at 0.5% for not just 2010 but possible
several more years beyond. Above trend growth of 2.8% by the end of 2010 does
NOT imply an interest rate of 0.5%. This suggests a series of rises during
the year, so whilst the first half of 2010 my appear benign in interest terms
the second half could prove a rate shocker, which is suggestive of a a rate
in the region of at least 3%.
LIBOR
/ Base Interest Rate Spread Analysis
The
below graph shows the spread between 3 Month LIBOR and the UK Base Interest
rate.
The
above graph illustrates that the credit crisis did not just appear out of the
blue in September / October 2008 but began over a year earlier in August 2007
when the interbank money markets froze as a consequence of the fictitious
mark to market valuations on sliced and diced collaterised debt obligations
that the banks had accumulated. Whilst the central banks attempted to
unfreeze the credit markets through a number of increasingly desperate
actions during the subsequent 12 months however all of these measures failed
which resulted in a series of credit crisis earthquakes culminating in the
September 08 Lehman's bust which galvanised governments and central banks to
literally throw everything they had to bring the inter bank interest rates
down, which in the UK included cutting the base interest rate to virtually
zero and pressing the monetary nuclear button of printing money and forcing
the tax payers to guarantee more than £1 trillion of bad bank debt
which has resulted in bringing the base rate / LIBOR spread down to within
historic norms, but at huge cost to bank customers including borrowers and
savers as the following illustrates.
Banks
Profiteering From Artificial Banking System
The
artificial banking system means that the bill for rebuilding the bank balance
sheets (and bonuses) is being paid by Borrowers and Savers who along with all
tax payers are being forced to pay for the bankster's crimes as tax payer
bailed out banks such as HBOS pay a pittance on instant access savings
accounts of as little as 0.1% against a requirement of 2.3% just to cover CPI
inflation of 1.9% plus the 20% tax charged on interest whilst at the same
time upping the rate on borrowers far beyond the illusion of low interest
rates as presented by a base rate of 0.5% as the following graph illustrates
the spread between the mortgage standard variable rate and interbank market
rate resulting in a huge profit margin for the banks.
Money
is being sucked out of the pockets of borrowers and savers and being
deposited onto the balance sheet of bailed out banks that have no incentive
to pay a decent rate of interest on savings when they can borrow at 0.5% from
the Bank of England and marginally higher from other banks. The artificial
banking system is resulting in unprecedented huge profits margins for the
banks as market interest rates charged to retail borrowers continues to rise
regardless of the base rate being held at 0.5% into 2010.
The
big question is when will the Bank of England start to reduce this
unprecedented artificial support for the UK banks. The marginal up tick in
the LIBOR spread suggests that this is now underway to a small degree.
However we are talking about a minute movement. The key indicator for a
series of increases in interest rates will be when the spread rises to above
0.3 from the current 0.13, which considering the first graph suggests that
this is not on the immediate horizon and therefore implies that we are still
some months away from the first rate rise i.e. the trend is suggestive of no
rate rise during the first half of 2010.
Do UK
Interest Rates Lead or Lag CPI Inflation?
One of
the Bank of England's primary objectives is to target UK inflation at CPI 2%
in 2 years time and stay within a range of 1% and 3% through the use of
monetary policy with the primary tool being interest rates. The consensus
view is that when inflation is expected to rise then the Bank of England
raises interest rates, and where the Bank of England expects inflation to
fall towards its lower band then it lowers interest rates so as to boost
economic activity and hence inflation. Therefore the purpose of this analysis
is to confirm the role inflation plays in determining the Bank of England's
primary objective of managing inflation and what it suggests for interest
rates during 2010.
The
below graph includes the Inflation forecast for 2010 as of December 2009
which projects towards a sustained trend to above 3% which on face value would
imply the Bank of England should start raising interest rates.
The
above graph implies that the Bank of England tends to react late to changing
inflation and then continues the interest rate trend too far in the opposite
direction which implies ever increasing volatility in the series. Given the
already completed inflation forecast this implies that the Bank of England
will respond much later than expected to rising inflation, though when it
does respond it will continue raising interest rates even after inflation
turns lower, which is suggestive of interest rates rising from mid 2010 and
continuing into mid 2011,with smaller initial steps of 0.25%, throughout the
proposed 12 month forecast cycle.
UK
interest Rates and M4 Money Supply Relationship
The
below graph shows UK M4 Money Supply and Money Supply adjusted for the
velocity of money that takes into account the state of the UK economy i.e. an
booming economy has a higher velocity of money and hence money supply has a
more inflationary impact than an economy in recession where high headline
money supply in reality is masking deflation rather than inflation as we saw
during 2009.
The
above graph shows some relationship between interest rates and the money
supply adjusted for the velocity of money (red) in that when the M4 Adjusted
is below 10% the Bank of England cuts interest rates and when it is above 10%
the Bank of England raises interest rates.
The
graph shows the consequences of extreme deflation into early 2009 which was
followed by the unprecedented near panic interest rate cuts to 0.5%. The
subsequent trend is resulting in a fast M4 recovery though which at this
point remains negative, however the projected trend can be seen reaching the
10% level by mid 2010 and therefore implies UK interest rates may be held at
0.5% until mid 2010 before interest rates are gradually raised as long as M4
Adjusted remains above 10%. This also suggests should Adjusted M4 continue to
accelerate well above 10% then the pace of rate rises could escalate further
i.e. in 0.5% jumps.
UK
Interest Rates and GDP Growth Trend Relationship
The
below graph shows UK Interest rates against annual GDP as well as the spread
between the two. Also included is the current forecast trend for UK GDP
growth for 2010 and 2011.
The
above graph shows an average interest rate spread against annual GDP of 2%,
with a wider range of 4% to 1% i.e. UK interest rates are normally expected
to be 2% above GDP. The current spread as of Q4 estimate of -4.73% is at
5.25% which illustrates why the Bank of England embarked upon Quantitative
Easing aka money printing in March 2009 as interest rates of 0.5% had little
impact on the actual economy at the time due to the degree of economic
contraction under way.
However
taking the strong forecast GDP growth into account that projects to +2.8% for
2010 and +2.3% for 2011, then the current base interest rate of 0.5% will
result in a swift plunge in the real economic interest rate to far below the
trend of 2% and the low of 1%, which therefore suggests that the UK interest
rate by the end of 2010 would be targeting 4% to stay within this range and
rise to 4.5% by mid 2011. Off course this is dependant upon the strong GDP
forecast growth of +2.8% actually transpiring, nevertheless this analysis
does suggest that even a mild recovery of below trend to +1.5% would still
target an interest rate of at least 2%, therefore this analysis is suggestive
of an end 2010 interest rate range of between 2% and 4%.
UK
Quantitative Easing Money Printing to Hit £275 Billion 2010
The
Bank of England cut UK interest to a historic low of 0.5% in March 2009 for
the objective of boosting the economy so as to enable it to SELL government
bonds, however this did not work as bond auctions started to FAIL in March,
which therefore triggered the Bank of England to hit the panic button, igniting
Quantitative Easing or Quantitative Inflation, having received the green
light from the Government a few months earlier.
The
initial print run was for £75 billion which has been steadily extended
to £200 billion to date. Nine months on the phrase Quantitative Easing
is bandied about in the press as though it is normal, however I cannot
emphasis enough how big an event Quantitative Easing aka Money Printing is,
QE is the biggest monetary event in the Bank of England's 315 year history,
as once ignited it is difficult to wean an economy off of QE as Governments
fail to control the budget deficits that become endemic which demands a
continuance of Q.E. and therefore risks igniting Quantitative Inflation and
currency / market panics.
QE
Huge Boost to GDP
I have
received a few emails critical of my strong UK growth forecast for 2010 of
+2.8%, mostly from those that expect / hope for a double dip recession that
would allow them a second opportunity to buy into the stocks bull market at
near the bear market lows having missed the birth of the stocks stealth bull
market last March, in that light the following may enlighten readers on the
huge boost to GDP during the past 9 months:
Whilst
approx £190 billion of the £200 billion of QE authorised to date
has been deployed over the past 9 months. However the true implication of QE
on the economy can be better appreciated when setting it against the
recession that has seen a contraction of some 6.2%, as QE of £180 to
£200 billion is equivalent to GDP of 14% to 16% i.e. far greater than
the loss of GDP during the 15 month recession, and not forgetting that QE is
just one part of the programme of huge Government deficit spending (14% of
GDP) and near ZERO interest rates (Savers subsidised bailouts) and the over £1
trillion of bailed out banks bad debt liabilities, then direct capital
injections of over £80 billion (6% of GDP) illustrates the extreme
lengths to which the authorities have gone to, to bring the recession to a
halt, which sows the seeds for above trend growth during 2010.
The
Bank of England's Route towards £200 billion QE
The
Bank of England embarked upon a programme of printing money or Quantitative
Easing during March 2009 with an initial print run of £75 billion of a
total set at £150 billion in an attempt to wave the central bank magic
wand to increase the supply of credit. However as I warned at the time (5th
March 2009: Bank of England Ignites Quantitative Inflation) that once started
the Bank of England would continue printing money right into the May 2010
General Election targeting an print run of as much as £450 billion and
therefore igniting Quantitative Inflation during 2010.
Virtually
all of the mainstream press swallowed the Bank of England's hints and winks
that Quantitative Easing had ended at £125 billion during the summer
months, which at the time I stated was not possible (8th July 2009:
Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to
Rise)
This
confirms my view that the Bank of England will continue printing money into
year end to beyond the current arrangement of £150 billion and probably
as high as £250 billion.
I
projected a Quantitative Easing total towards £250 billion by the end
of 2009 with the actual total of £200 billion of money printed as a
direct consequence of the Labour Government's objective of both aiming to
maximise the number of seats retained at the next General Election as well as
to deliver a scorched earth economy to the next Conservative Government.
Therefore the Labour Government also wins because it gets to hide this
Quantitative Easing debt as theoretically purchases and sales cancel each
other out in the fantasy land of central banking accounting and feeble
government auditing. I.e. by magic approx £200 billion of new government
debt has vanished into thin air, for if had not been hidden under the carpet
then UK Gilt interest rates would be much higher due to the increase in
supply of approx 33%.
Asset
Price Implications of the Potential End of Q.E.
Quantitative
Easing being brought to an halt / unwinding of purchases would hit asset
prices hard, i.e. we would see the Gilt bond market impacted as instead of
purchasing 'most' of the government bonds the Bank of England would become
its biggest seller with a lot of supply overhanging the market this would
send the bond market into a tailspin which would follow into the stock market
that has soared in good part as a consequence of Q.E., similarly the bounce
in UK house prices would soon evaporate. This suggests whilst the BoE talks
of ending Q.E. I just don't see it happening whilst the Government runs a
budget deficit anywhere near as large as 15% even half of this would not be
enough to end Q.E. So it looks like Q.E. will be here for many years as I
originally voiced before Q.E. began. However as the asset markets stabilise
at higher levels, the Bank of England rather than printing new money may
entice banks and financial institutions to purchase bonds rather than further
drive up stocks which is therefore suggestive of a tough year for other asset
prices.
Bank
of England Forcing Banks to Buy Gilts
The
official line of QE was to boost bank lending, however Q.E. is apparently
having the opposite effect at the commercial banks as the Bank of England's
twin objectives of monetizing government debt and for the the bankrupt banks
to improve their balance sheets is in effect forcing the banks to BUY
government bonds as Gilts are seen as the safest asset class and therefore
boosts the Banking sectors credit worthiness in terms of capital ratios so
instead of lending tax payer money loaned to the banks, the banks are using
tax payer money to buy government bonds and on short-term deposit at the Bank
of England.
Surely
this must be by design as the Bank of England's primary purpose is for the
orderly management of the Government debt market hence this is ensuring the
maximum demand for a huge amount of debt issuance estimated at £225
billion for the current financial year, which includes new debt and maturing
debt rolled over.
Continuing
Budget Deficits for Several Years
Even
if the next government manages to implement significant policy measures to
cut the annual deficit by £80 billion year to approx £100 billion
by means of tax rises, spending cuts and revenue from growth, against the
Labour governments target of £162 billion. A deficit of £100
billion would still equate to about 8% of GDP, so would still require more
money printing to monetize government debt of which approx
£60-£70 billion would need to be monetized.
Bank
of England Blaming Government, Seeking Greater Powers From Conservative
Government
Governor
of the Bank of England has been ever more vocal during 2009 in his criticism
of the governments policy of only cutting the huge deficit over the next 5
years by half as clearly this is not a sustainable policy. However whilst
Mervyn King is busy blaming others he needs to take a long hard look in the
mirror at his own failure both before the crisis broke and right into the
present day. The Bank of England has consistently shown itself to be an
incompetent institution that tends to act too late to respond to both
inflation and economic concerns which has directly contributed to the depth
of the 2009 crisis. The truth of the matter is that had the Bank of England sat
twiddling its thumbs during 2008 by keeping interest rates at 5% for far too
long whilst the economy burned which pushed the economy over the edge of the
cliff. The MPC committee is generally populated by clueless academics that
collectively usually result in an overly cautious wait and see attitude, by
which time it is generally too late!
Also I
should remind readers that interest rates were only cut in early October 08
when the Prime Minister effectively seized control of monetary policy by
forcing the Bank of England to start cutting rates as illustrated by the
first cut of 0.5% which was announced on October 8th 2008 by Gordon Brown
himself from the Prime Ministers dispatch box in the House of Commons rather
than by the Bank of England.
Mervyn
Kings continuing criticism is even more outrageous in the run up to General
Election as clearly his party political outbursts electorally favour the
Conservatives, probably helped by George Osbourne's recent comments that he
would transfer even more powers to the Bank of England despite the fact that
it consistently fails in its primary government set objective of keeping
Inflation at 2%, as we will again repeatedly witness during 2010. Though the
FSA charged with regulating the banks has been even less competent which
despite knowing as a fact that banks such as Northern Rock and HBOS were
lending 100% mortgages financed from short-term money market borrowings which
resulted in an extremely high risk institutions, but the FSA FAILED to
regulate the banks for several years in the run up to the August 2007 credit
crisis and beyond.
QE is
Just More Bankster Fraud
Were
told by the politicians and the Bank of England that money printing is to
boost the UK economy, NO the primary purpose of money printing is to enable
the banks to generate huge profits to rebuild their balance sheets, which
they are doing. If the government wanted to boost the economy rather than
banks profits then the government should have taken the £200 billion
printed and given it to the 29 million or so of tax payers which would have
resulted in a huge cash for consumption windfall of nearly £7000 per
tax payer ! Now that WOULD have immediately boosted the economy ! Imagine 29
million people receiving a cheque for £7,000 each, imagine the resulting
consumption boom that would take place. So the FACTS are that the £200
billion is for the purpose of bankster's to profit from then to boost the
economy, which is what one would expect the BANK of England to do ! i.e. to
support its brethren bankster's then to consider the debt slave tax payers
that are being forced to bail the bankster's out.
QE
Money Printing 2010 Conclusion
QE
will continue during 2010 until the Bank of England is sure that a. their
brethren bailed out banks no longer risk financial armageddon, and b. That
government debt issuance does not risk a Gilt bond market collapse.
My
original estimate was for QE to rise to £450 billion over the next 5
years (from 2009), therefore I expect we will pass the half way point during
2010 as I expect the Bank of England keep printing printing money for several
more years.
The
Bank of England's December 09 announcement that it would now buy and sell
corporate paper to me suggests that the Bank is considering selling what
little of corporate paper it has bought during the past 9 months in favour of
supporting the Gilt bond market. Therefore I expect this coupled with further
incentives for banks to buy gilts means much less QE during 2010 than 2009,
which suggests a target total for 2010 of £275 billion, whilst at
present academic economists and mainstream press suggest that there would be
no further Q.E. beyond £200 billion and even that the Bank will seek to
unwind QE during 2010 i.e.
Bank
set to close the £200bn printing press - Independant 8th Jan 10
The
Bank of England's £200bn quantitative easing (QE) experiment is set to
come to an end next month, with the Monetary Policy Committee (MPC) yesterday
voting to leave the scale of the scheme on hold. The remaining money in the
programme will be exhausted by the time of the MPC's February meeting and it
is then expected – barring shocks – to take the economy off its
life support system.
Though
the mainstream press said basically the same thing last July when Q.E. was at
£125 billion, as mentioned earlier.
Money
Printing Theft of the Value From Holders of Existing Currency
Quantitative
Easing is not a free lunch, the price of which is being paid by savers as the
supply of money increases so does it decrease the value of all currency, this
is most clearly evident by two indices,
1.
Sterling exchange rate against other currencies, though all currencies are
engaged in competitive devaluation so therefore probably something like gold
is a better indicator in this case 2009 saw a devaluation of about 20% with
more to come during 2010.
2. The
inflation indices of which the Consumer Price Index is the governments
preferred measure. Throughout 2009 and into 2010 we have seen the base
interest rate BELOW the rate of CPI inflation which means NEGATIVE real
interest rates i.e. your rate of interest is below the rate of inflation.
This means that the bill for low / negative interest rates is being paid by
Savers who along with all tax payers are being forced to pay for the
bankster's crimes as tax payer bailed out banks such as HBOS pay a pittance
on instant access savings accounts of as little as 0.1% against a requirement
of 2.3% just to cover CPI inflation of 1.9% plus the 20% tax charged on
interest.
Implications
for Interest Rates
The
Bank of England is likely to be reluctant to raise interest rates whilst Q.E.
continues. Which therefore suggests rates will only rise when the Bank of
England is forced to raise rates by the markets as a consequence of risks of
bond purchases. Which suggests 2010 is going to be a difficult year to forecast
interest rates.
Improving
UK Mortgage Lending Feeding the House Prices Bounce
The
below graph shows UK Mortgage lending for House Purchases and Equity
Withdrawals
The
Government and Bank of England have succeeded in their primary objective of
increasing both the supply of mortgages and lowering the interest rate burden
on borrowers so as to bring the UK house price crash to a halt, which
suggests that in terms of supply, the credit markets are starting to return
to a LOW NORMAL state.
UK
house prices have now risen by nearly 10% from the March lows as a
consequence of unprecedented measures such as near zero base interest rate,
mortgage banks arm twisting to limit repossessions and £200 billion of
money printing. All of which leave the governments coffers empty and the Bank
of England with little ammo to fire at future crisis which therefore suggests
that the Bank of England should start to focus in the near term to tepidly
begin to unwind the ultra loose monetary policy by starting to gradually raise
interest rates though without wanting to unravel the work done so far in
stabilising the banking system which therefore is suggestive of small steps
spread out rate increases as the Bank of England adopts a cautious wait and
watch attitude for any negative impact before each subsequent rate rise.
British
Pound Trends and Interest Rates
The
below graph shows the UK base rate and sterling trends against the U.S.
Dollar and Euro to test the widely held hypothesis that Rising UK interest
rates results in a rise in the exchange rate and conversely cuts in UK
interest rates results in a fall in sterling.
The
Pound / Dollar trend suggests that GBP tends to lead UK interest rates i.e.
sterling has a tendency to rise against the Dollar ahead of UK interest rate
hikes and a tendency to fall against the Dollar ahead of UK interest rate
cuts. The most recent price action has seen sterling rally from £/$1.40
in early 2009 to above £/$1.60 as of the present which therefore
implies that the currency markets are discounting future interest rate hikes.
The
Pound / Euro trend suggests that the objective is aimed towards a stable
exchange rate against the Euro i.e. less volatile hence interest rates are
used in an attempt to limit fluctuations as we saw between 1999 and 2007, as
when the £/Euro rate was high at 1.60, interest rates were cut, and
when the £/Euro was below the floor of about 1.40 then interest rates
had been steadily increased so as to maintain the 1.40 floor. This is part of
the Bank of England's objective of ensuring price stability by tracking the
Euro.
However
during 2008 and 2009 we saw a crash in sterling that traded below 1.10 to
near parity with the Euro as the Bank of England abandoned everything in the
interests of preventing financial and economic armageddon. However as the
banking system has gradually stabilised it is highly likely that Bank of
England focus will again shift towards price stability which means keeping
sterling with an range against the Euro.
The
£/Euro has managed to trend higher from near parity 12 months ago to
today stand at 1.10. This is suggestive of a higher range then seen over the
past 12 months i.e. a probable wide target range of between 1.10 to 1.30
against the Euro, therefore the current rate is at the floor which suggests a
rise towards the target mid range of 1.20 which on face value suggests
further downside trend is limited and more than likely that the Pound will
rise against the Euro towards 1.20, which therefore suggests UK interest
rates should be relatively higher than the ECB interest rate to reinforce
this trading range.
In
summary, the sterling trend is suggestive of the Bank of England targeting a
£/Euro trading range of between 1.10 and 1.30, which is therefore
suggestive of relatively higher UK interest rates against the Euro-zones
which my next analysis will look at.
UK,
U.S. and Euro Interest Rate Trends Analysis
The
below graph shows the key interest rates for the U.K., U.S. and E.U. so as to
determine any advance trend change signals for UK base interest rates during
2010.
Fed Funds
- The above graph clearly shows that the U.S. Fed Funds rate usually acts as
a leading indicator for U.K. interest rates both in terms of timing and in
terms of trend. The current trend shows no sign of an imminent increase in
the Fed Funds rate and therefore implies a UK base interest rate increase is
not imminent either.
ECB -
The European key interest rate trend shows a less volatile dataset then
either that for the U.K. and U.S. which suggests a more cautious response to
economic events, this is borne out by the tendency for European interest rate
trend changes to lag both the U.S. and U.K. and therefore not particularly
useful in signaling UK interest rate trend changes. However European interest
rates are usually significantly below that of the UK interest rate due to
less perceived risk, with a normal UK rate usually at least 1% above the
European rate therefore at present would indicate a interest rate of 2% as a
minimum.
Summary,
U.S. Rate changes tend to lead UK rate changes, with UK rates usually at
least at a 1% premium to either European or U.S. rates which therefore
illustrates the current state of an artificial heavily subsidised banking
system with no sign visible that the central banks are willing to return to a
normal market at this point in time and therefore implying that the first UK
interest rate hike still remains some way off.
UK
Interest Rate Forecast 2010 - 2011 Conclusion
The
difficulty in arriving at an interest rate forecast conclusion for 2010 is
that we have a heavily supported artificial banking system for the primary
purpose of the near unlimited bailout of the banking sector. The problem in
arriving at the forecast is that I need to look beyond economic indicators
and put myself into the mindset of the scared officials at the helm of the
Bank of England, who having tasted financial and economic armageddon are now
so terrified by what they saw that they would rather continue to support the
bankrupt banking sector for far too long and thereby allowing the bankster's
to continue effectively stealing billions of tax payer cash as 'bonuses' and
also allow price inflation to let rip as a consequence of printing money.
But
against this petrified Bank of England reluctant to do anything that may risk
a return to financial armageddon we have the market in the wake of a flood of
government debt issuance that despite ever increasing quantitative easing
demands higher interest rates, otherwise the Bank of England risks Gilt
Auction failures which could trigger a sterling crisis during 2010. So it is
both a tough balancing act for the Bank of England and a tough call for
anyone to attempt to forecast UK interest rates for 2010.
So why
forecast if it's so difficult this year ?
Well,
because finance and investing IS all about forecasting the future, perhaps if
the bankster's had registered this fact then they would not have been caught
up in generating short-term fictitious profit reports to bank huge bonuses,
when at the end of the day today's decisions should boil down into what one thinks
is a probable future outcome so as to allow investment decisions to be made
in the present.
The
primary message from my accumulative analysis of inflation, economy and in
this article is that the Bank of England WANTS to swim in the warm waters of
Inflation after the deep freeze of Deflation, which strongly implies that the
Bank of England will IGNORE soaring inflation early 2010 and instead DELAY
raising interest rates until it sees actual evidence of a strong economic
sustained recovery which my analysis suggests should transpire during the
first half of 2010. Therefore the BoE will be focused on the quarterly GDP
data, first Q1 to be released at the end of April 2010 and then Q2 to be
released late July 2010. Which means that there is a high probability that
the first rate rise may not materialise until August 2010. After which rates
will be increased not in line with inflation but in line with improving GDP
and other indicators of economic activity into the end of 2010.
As a
final conclusion, I expect a presently petrified Bank of England to be
gradually forced by the market to start raising the UK Base interest rate in
small steps of 0.25%, with the first rate rise probably coming just before
release of Q2 GDP Data (July) in June 2010 i.e. after the next election
deadline and then followed in August and September 2010 on further indicators
of improving economic activity. My concluding target is 3% by mid 2011, the
difficulty is in saying where rates will be at the end of 2010 as the range
is 1.5% to 2%.
UK
Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid
2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into
Mid 2011 to Target 3%.
Interest
Rate Forecast Implication
The
full implications of all three in depth analysis and forecasts for UK
inflation, economy and interest rates will follow in the inflation mega-trend
ebook to be completed over the coming week which I am making available for
free. Ensure you are subscribed to my always free newsletter get this in your
email in-box.
Election
- The Deadline for the next election is June 3rd, therefore even if Gordon
Brown decides to cling onto power until the very last minute then there will
still be no rate rise in the lead up to the next election. The most probable
date for the next election remains May 2010 as the economy 'should' be
showing clear signs of a strong recovery by then, despite negative impact of
tax hikes.
My
original projection as per the UK election forecast of June 2009 remains that
projects the Conservatives on 343 seats, Labour 225 and Lib Dems on 40.
Although the people of Britain got a window into who really owns and runs the
country as the Government literally risked unlimited liabilities for the tax
payers to bailout the bankster's who instead of being charged with the fraud
of the century are again be rewarded with billions in bonuses which is in
fact tax payers cash funneled into their back pockets. Labour has shown
itself to be no different then the Conservatives when it comes to being in
the back pockets of the bankster elite.
Borrowers
Firstly
do not forget that the primary purpose of the banking sector is to turn
everyone (including governments) into debt slaves. So the first objective is
for people implement a plan to FREE themselves from DEBT SLAVERY. The
artificial banking system is currently running on a huge profit margin which
means borrowers are paying through the nose despite a 0.5% base interest rate
and 0.63% interbank rate i.e. borrowers are paying many multiple of times in
excess of the rates banks borrow at, from mortgages with SVR's hovering
around 6%, to personal loans of 10% to 15% to credit cards of 20%+, which are
generating huge profits for the tax payer bailed out banks supposedly for the
purpose for the banks to rebuild their balance sheets but as we are again
witnessing is in significant part being pocketed by bankster's as bonuses for
profits that ONLY exist because of the tax payer cash.
So
given the fact that the banks are already running on huge profit margins,
therefore I do not see much change for most borrowers rates during the year
as the interest rates charged are already excessively high which effectively
discount a much higher base interest rate north of 4%, which means there is
plenty of scope for borrowing rates to actually fall during the year rather
than to rise.
Mortgages
- Over 90% of people can only get on housing ladder with a mortgage,
therefore the prime consideration for borrowers is in able to service the
loan, in this regard the long standing but often broken rule of not borrowing
more than X3.5 salaries should be at the forefront of ones mind. This rule is
not to prevent you from buying a bigger house, but to prevent you LOSING your
current house. That coupled with a minimum deposit of 25% should say one is
able to buy. If someone only has a 5% deposit or not enough income then to be
blunt you should NOT consider buying a house. I will cover the UK housing
market in depth in my next ebook. I expect mortgage interest rates to be
little changed for most borrowers. However those that are the most desirable
customers in terms of credit risk are likely to see the rates on the best
products rise marginally.
Pay
Day Loans - During the recession many pay day loan outfits have sprung up
that offer to fill the gap between each pay cheque with near instant small
loans of upto £1000 that borrowers are further enticed to roll over
into the pay day. To be blunt, if you are considering these types of loans
then you might as well put a gun to your head! for all of the distress they
will eventually cause you. Whilst the base rate is at 0.5%, pay day loan
outfits are charging over 2,000% APR. These types of loans should be illegal
in Britain but they are not, which just goes to show either how inept the
financial regulator is or culpable in allowing ordinary citizens to fall
victim to 'legal' loan sharks. If the FSA had the best interests of the
general public at heart then it would lobby the government to introduce
legislation to CAP ALL interest rates at base rate plus 10%. Yes it would
mean that the financially illiterate presently taking on extremely high a
risk loans would usually be denied loans due to the risk / reward factor, but
that is how it should be.
Savers
After
the wipeout of 2009 when savers subsidised the bailout of the banking sector
through ultra low interest rates of as low as 0.1%, 2010 should see some
decent recovery in nominal rates and hopefully in real rates of interest as
well (after inflation). The best variable rates are usually 1% to 1.5% above
the base rate. Fixed rates demand a premium of approx 2 to 3% depending on
the term fixed. So by the end of 2010, this is suggestive of a variable rate
in the region of 2.75% to 3.5% and fixed rates of between 4% to 5%, which
should BEFORE the first interest rate hike as market competition will move
ahead of the curve to discount future interest rates mid year. This suggests
savers are probably better off NOT fixing now in advance of rising market
savings rates by the time of the first base rate hike.
Foreign
Banks Offering Higher Rates - Remember Iceland ? Stay with British
institutions which is both good for Britain as well as depositors, because if
a foreign institution goes bust and then the foreign government defaults on
its obligation to pay (as Iceland has apparently done) then the British tax
payer will be black mailed into stepping in to cover this money as the
consequence of not doing so would result in a run on virtually all banks.
Stock
markets - My in-depth analysis for stocks will follow, but rising interest
rates are not particularly good for stocks as higher yields will attract
investors away from stocks, which is not conducive to anywhere near as strong
a bull run during 2010, therefore suggestive more of sideways trend for the
stock market during 2010.
Commodities
- Rising inflation is good for commodities but rising interest rates less so
for zero yielding assets such as gold, still my forecast of November 2nd 08
still stands as of Gold $1042, in that target $1300 by March and higher still
during the second half of 2010. I will again do an in depth analysis on gold
this month as part of the Inflation Mega-trends ebook.
Press
and Economic Organisation Interest Rate Expectations
Bank
of England interest rates 'will not rise until late 2011' - Houseladder -
12th Jan 2010
Alan
Clarke, UK economist at BNP Paribas, says: "During 2011 GDP (gross
domestic product) will be very sluggish, we will be in a soft patch and I
think inflation will be very low."
He
argues that these factors will support the bank maintaining low interest
rates for 2010 and much of the following year.
According
to the economist, the Bank of England will not change its mind and raise
rates just because a positive GDP is seen.
Roger
Bootle, economic adviser to Deloitte, echoes Mr Clarke's comments predicting
that interest rates will remain at below one per cent for the next five
years.
No UK
rate hike seen until Q4 2010, QE capped -Reuters poll - Guradian - 22nd Dec
2009
*
Rates to rise to 1.0 percent in Q4 next year
*
Quantitative easing programme capped at 200 bln pounds
LONDON,
Dec 22 (Reuters) - The Bank of England won't raise interest rates from a
record low until the fourth quarter of next year, according to a majority of
62 analysts polled by Reuters,
No hike
in sight for interest rates - Interactive Investor - 7th Jan 2010
"Whilst
inflation is certainly rising and there are signs of growth and improvement
in the both the services and manufacturing sectors, talk of a recovery is, as
yet, far too premature. Until the Bank of England sees consistent evidence
that banks are lending more regularly, interest rates will continue to be
held at 0.5% until the beginning of 2011 at least."
The
above implies a current consensus view that either UK interest rates will
remain at 0.5% until early 2011 or a small rise in the fourth quarter 2010 to
target 1%, against my target of trend of 2% on route 3% by mid 2011.
Therefore watch how the press and academic economists busily revise interest
forecasts higher mid 2010 AFTER the event, i.e. AFTER market interest rates
have already risen to discount behind the curve Bank of England rate rises.
Much as the press ran with the forecast by CEBR UK Interest Rate Forecasts
0.5% Until 2011, Below 2% until 2014 of October 12th 2008. Which I concluded
at the time had a 90% probability of being wrong as a confluence of debt
monetization of the 15% budget deficit that implied higher inflation and thus
higher interest rates.
Source and Add
Comments Here: http://www.marketoracle.co.uk/Article16450.html
Nadeem Walayat
Market Oracle.com.uk
Nadeem Walayat is
the editor of MarketOracle.co.uk.and has over 20 years experience in trading
and investing.
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