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5 "Tells" that the Stock Markets Are About to Reverse

Bank of England Keeps UK Real Interest Rate at Minus 1.1%

Interest-Rates / UK Interest Rates Oct 08, 2009 - 12:57 PM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe Bank of England as expected has kept the UK base interest rate on hold at 0.5% which translates into a real interest rate of -1.1% adjusted for CPI inflation of 1.6% which continues to seek to punish savers for the crimes of the bankers.


The UK base interest rate is being kept artificially low so as to enable the bankrupt banks to rebuild their balance sheets by overcharging customers against the base interest rate and the interbank market rate of 0.54% as the real market interest rates have been in a steady climb since March 2009 which has increasingly meant that the base interest rate has become irrelevant to the retail market place as explained in the article - Bailed Out Banks Not Lending, Sitting on Tax Payers Cash.

The outlook remains for rising market interest rates charged to retail customers regardless of the base rate being held at 0.5% into the end of the year, which is inflationary in terms of rising mortgage costs.

Savers are yet again being hit by the 20% tax on savings and therefore require an interest rate in the order of 2% just for savings to keep pace with inflation and taxes. This is set against the tax payer bailed out banks such as the Halifax paying a pittance of just 0.1% on across the range accounts from current accounts to savings accounts with other mainstream institutions not far better, which is a consequence of bailout out the bankrupt banks that has resulted in an artificial market heavily skewed in favour of the bailed out bankrupt banks making huge profits so that tax payer capital injections can be repaid, in-effect the government giving free cash to the banks to enable the banks to repay capital for political reasons. Under a free market system the banks would be forced to raise interest rates paid to customers to entice savers, however in today's market the Treasury and the Bank of England fund the banks to the tune of liabilities of £1.5 trillion that has resulted in the countries liabilities doubling from £1.7 trillion at the end of 2007 to £3.4 trillion by the end of this year.

UK Deflation

The trend in inflation data remains inline with my original forecast as of Dec 08 that forecast deflation into mid 2009, followed by a slowly rising inflationary trend during the second half of 2009. RPI of -1.3% will also have the effect of depressing wages as this measure is used to determine pay deals therefore continuing deflation throughout 2009 despite money printing which suggested overshoot on RPI to the downside that has come to pass.

The trend into Extreme UK Deflation as measured by RPI has come to an end, forward inflation is expected to rise at a subdued rate as result of the economic recovery into the 2010 general election with RPI targeting +1% so Yes RPI Deflation will come to an end, but thereafter the high risk of a double dip recession expectation suggests the shallow uptrend in inflation will come to a halt during 2010 despite further quantitative easing and arm twisting of the banks to LEND into 2010 as the Bank of England attempts to increase the velocity of money by all means with even the option of negative interest rates to force the banks to take risks rather than park their tax payer bailout money at the BoE to earn risk free interest on.

Subscribe to my always free newsletter to receive in depth analysis on UK interest rates and economy.

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 400 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.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Domhnall
09 Oct 09, 20:39
Thanks keep up the good work !!!!!!

Dear Nadeem,

Thanks for all your analysis. There is loads for USA but the UK analysis can be thin on the ground. You are perceptive and articulate.

I disagree with your analysis on Scottish Independence but agree with almost 100% of everything else.

I would love an article vis a vis what the average uk person/family should actually DO, given all the great analysis you provide. This is especially needed in the context of the vulnerability of the Pound and the potential to wipe out hard working uk citizens.

Thank again for all your hard work.

Best Regards

Domhnall


Nadeem_Walayat
09 Oct 09, 20:41
What to do ?

Hi

I am working an an ebook that will include indept analysis ofthe UK economy including forecasts for the next 5 years and what savers and investors should do.

It should be completed within the next 4 to 6 weeks and will me made freely available at the market oracle

Best

NW


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