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UK interest Rates and M4 Money Supply Relationship

Interest-Rates / UK Interest Rates Jan 09, 2010 - 03:05 PM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThis analysis forms part of a series that aims resolve in an accurate UK interest rate forecast for 2010 which follows in depth analysis and forecasts for UK inflation and economy.


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 consquences of extreme deflation into early 2009 which was followed by the unprecidented 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 rate Forecast 2009

The UK interest rate forecast of early December 2008 for 2009 forecast that UK interest rates should decline to 1% (from 3%) by early 2009 and remain there into the second half of 2009. However following the cut to 0.5% in March 2009, 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 means 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.

Forecasts for UK Inflation and Economy 2010 and Beyond

The below are the concluding forecast graphs from in depth analysis for UK inflation and economy that build towards the UK interest rate forecast for 2010 as well as the inflation mega-trends ebook. To receive the final analysis and forecast in your email in box, ensure you are subscribed to my always free newsletter.

UK inflation Forecast for 2010

UK Economy GDP Forecast for 2010 and 2011

Source: http://www.marketoracle.co.uk/Article16360.html

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

Copyright © 2005-10 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 UK inflation, economy, interest rates and the housing market . Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 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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