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

CEBR UK Interest Rate Forecasts 0.5% Until 2011, Below 2% until 2014

Interest-Rates / UK Interest Rates Oct 12, 2009 - 06:56 AM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe Centre for Economics and Business Research (CEBR) is forecasting that UK interest rates will stay at 0.5% into 2011 and not reach 2% until 2014.


In my opinion It is not possible to accurately project UK interest rates beyond more than 12 months forward given the risks that the budget deficit of 15% of GDP and debt monetization pose to the currency and the wider uncertainty of global instability that could result in stagflation i.e. high inflation and low growth, therefore it is highly probable (90%) that the CEBR's interest rate forecast of UK interest rates remaining below 2% until 2014 will prove to be wrong .

The basis of the CEBR projection is on the premise that the next government will slash the budget deficit by £100 billion broken down by £80 billion in spending cuts and £20 billion from tax rises.

My own analysis calls for £50 billion of additional cuts to bring the deficit to below 6% of GDP, anything less risks a Black Wednesday i.e. financial markets panic dumping sterling, uk bonds, stocks and other assets - Conservative £7 Billion Spending Cuts a Drop in Britain's Debt Ocean

The CEBR is also now forecasting an additional £75 billion of Quantitative Easing, aka money printing on top of £175 billion.

The CEBR is some 3 months behind the curve on QE. The consensus view of 3 months ago was that the Bank of England had completed its Quantitative Easing programme, which at the time I warned was not possible and to expect QE to run to more than £250 billion by year end. - Bank of England Panics and Prints Another £50 billion to Prevent Economic Depression

The CEBR is also now forecasting UK economic growth of 1.3% for 2010,

This is line with my projection of February 2009 for a debt fuelled economic bounce into a May 2010 General election, that will soon peter out as the new government is forced to implement deep spending cuts.

CEBR is forecasting that the British Pound will fall to £/$1.40 in the coming months (current £/$1.59). Euro parity (current 1.08)

The US Dollar is at a critical level of 76, my forecast as of August 2009 (U.S. Dollar Bull Market Trend Forecast 2009 Update) remains for the USD to rally to 90 by the end of this year as long as 75 holds. A USD of 90 would result in a sub £/$ 1.40 exchange rate and probably sub £/$ 1.30. However USD break of 75 would target 71 and therefore result in an exchange rate trading range of £/$ 1.55 to 1.65.

How do the CEBR's past forecasts stack up ?

UK Economy - Feb 2009

Global decline for first time since 1946 - Feb 2009

CEBR had already flagged UK GDP contraction of 2.9 per cent in 2009, compared with a 2.3 per cent fall across the European Union and a 1.4 per cent decline in the US.

WRONG - UK economy looks set to record GDP contraction for 2009 of 4.5%, which is inline with my analysis of Feb 2009 - UK Recession Watch- Britain's Great Depression?

UK House Prices

CEBR predicts 28% fall in house prices before bottoming out - May 2009

According to the Centre for Economics and Business Research (CEBR), house prices have about a further 8% to fall before bottoming out.

The think tank is predicting that prices will reach their trough in early 2010 and will see modest increases next year but real price growth won‘t start again until 2013.

WRONG - UK house prices bottomed (election bounce) in May 2009 and are in fact bouncing higher into early 2010 i.e. the exact opposite of the trend forecast by CEBR - As per analysis of May 2009 - UK House Prices Tracking Claimant Count Rather than Unemployment Numbers

UK Interest Rates

CEBR - January 2009

Interest rates to fall from 2% to ½% before the summer–and stay there for the rest of the year –the lowest since the Bank of England was founded in 1694.

CORRECT - CEBR to their credit were spot on with UK interest rates. This compares against my own forecast of a month earlier at the start of December 2008 as illustrated below that forecast a fall from 3% to 1% by Mid 2009 - UK Interest Rates Forecast to Crash to 1%

Conclusion - The CEBR 1 year interest rate forecast may prove accurate, but their overall track track record is poor with a tendency to state the obvious some 3-6 months behind the curve. The CEBR 5 year forecast for UK interest rates should be taken with a big pinch of salt as far too many potential crisis lie ahead, basically it is just not possible to accurately forecast interest rates more than 12 months ahead which I will seek to remind CEBR in years to come long after today's mainstream press headlines have faded away.

A serious point that the CEBR fail to address is that the base interest rate has long since become irrelevant to the actual retail market interest rates as a consequence of bailing out the bankrupt banks which has created an artificial market skewed heavily in favour of the banks generating huge profit margins from their retail customers as the below graph illustrates. - Bailed Out Banks Not Lending, Sitting on Tax Payers Cash

To find out what I expect to transpire over the NEXT 5 years subscribe to my always free newsletter to receive this in your email box.

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

Mark
12 Oct 09, 13:13
Housing

Hi Nadeem, where do you see house prices heading going forward, do you see them dropping lower after 2010 or pusing higher?


Nadeem_Walayat
12 Oct 09, 20:30
UK house prices

Hi

indepth analysis is underway across the UK economy including house prices that will attempt to forecast all aspects of the UK economy for many years.

This will be completed by the end of this year (hopefully much earlier) and posted to the site as an FREE ebook,

NW


Gary
14 Oct 09, 23:24
Dollar Index

Hi Nadeem,

Where do you see a support at 75 on the dollar index. I looked at the continuous charts and I do not see a support until 73.50 if 76 is broken.

Your comments will be highly appreciated.

Thanks,


Ashwin
06 Feb 10, 15:12
Mortgage - Fixed or tracker

Hi Nadeem,

I am struggling to decide if I need to take a mortgae - 3 yrs fixed at 6.39% or 3.49% on a tracker for 2 years.

Can you please advise about the arket fluctuation.

Thanks,

Regards,

Ashwin


Gary
23 Mar 10, 06:18
Mortgage choice

Nadeem,

In your opinion what would be the best option in terms of mortgage choice?

I am in the process of moving house, i am torn between a fixed 5 year mortgage deal to cap risk as interest looks set to rise or is it better to assume interest will rise slightly instead of significantly over the next couple of years in which case i would be better on a tracker mortgage then move to a fixed.

The difference is significant in terms of monthly payments, i can adjust the term of the mortgage from 25 year to 20 years and still keep within my budget on the tracker, so long as interest rises by small amounts. By going onto a tracker i will benefit from paying more off the balance and less interest during the term.

Alternatively if interest jumps my payments could end up more than i can afford which i can avoid through a fixed mortgage.


Nadeem_Walayat
23 Mar 10, 09:45
mortgage rates

if it was me, I would fix for 5 years, the risks are to the upside.

Best

NW



14 Jun 10, 08:44
mortgage fix

Seems high as i can fix my mortgage on 4.8% for 3 years with the halifax and no charges to be paid.I am on variable rate now and torn between to fix or not.


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