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LIBOR / UK Base Interest Rate Spread Analysis

Interest-Rates / UK Interest Rates Jan 11, 2010 - 03:46 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.


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 thin air 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 graph illustrates.

The artificial banking system means that the bill for low interest rates 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.

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 UK banks. The artificial banking system is resulting in unprecedented huge profit 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 more 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.

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.

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/Article16414.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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