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LIBOR Interest Rate Nudges Below 1.5% On Quantitative Easing and Price Deflation

Interest-Rates / UK Interest Rates Apr 23, 2009 - 08:44 PM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe 3 Month Inter bank Money Market Interest Rate (LIBOR) drifted below 1.5% for the first time in over 50 years despite the budget busting deficit budget delivered on Tuesday. The prime drivers of lower LIBOR rates are the Bank of England providing near unlimited liquidity to the Banking System coupled with the 0.5% base rate coupled with Quantitative Easing (monetization of debt) with the prime aim of driving down interest rates across the curve i.e. from the short end to the long-end. This is further reinforced by the deflationary driven sentiment following RPI of -0.4% for March.


The impact of the panic measures has more or less negated the normal interpretation of a 1% spread between the base rate and the 3 Month LIBOR rate, given that LIBOR is now Negative against the official CPI inflation rate by -1.40% which would normally mean the market is discounting lower CPI inflation. But in this case means that the LIBOR rate does no longer represent a FREE MARKET interest rate as the inter bank market stopped functioning back in August 2007 and has since gyrated between extremes of credit crisis Tsunami waves and Credit Quakes to the current state of negative real interest rates.

The only real reliable measure of UK interest rates in the current manipulated rates environment can be found in the Market Oracle formulae based UK Real Economic Interest rate which actually stands at 4% on March basis as illustrated by the below chart and therefore suggests that the credit markets have not reacted to the panic measures to the same degree and remain at a relatively high level compared to the recessionary and deflationary economic environment, however the trend is in the right direction which follows the Credit Quake extreme of above 6% in September 2008.

The in depth UK recession forecast update is due for completion on release of GDP data tomorrow, to receive this in your in box make sure to subscribe to my always FREE Newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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