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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

OECD UK Interest Rates Must Rise to 3.5% During 2011 To Combat Inflation

Interest-Rates / UK Interest Rates May 31, 2010 - 10:29 AM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe OECD academic economics institution says that UK interest rates should rise to 3.5% by the end of 2011 to combat inflation. The OECD inline with other academic economics institutions remains as much as 6 months behind the curve by stating the obvious that inflation is too high AFTER inflation has risen to a 19 year high with RPI hitting 5.3% and CPI at 3.7%, by warning of higher UK interest rates AFTER market interest rates have already risen.


The OECD, much as the other academic institutions exists purely to consume government funding ( Tax payers cash totaling Euros 328million per annum) by stating the obvious and constantly revising what amount to near worthless rear view mirror forecasts AFTER the fact on virtually a monthly basis that is diligently regurgitated by the gold fishesk memory mainstream press as though it amounts to news.

The OECD states the obvious some 6 months after the fact:

"The reversal of the December 2008 VAT cut and higher fuel prices have contributed to the recent jump in inflation. Notwithstanding the temporary nature of these price developments, the gradual drift up of some measures of inflation expectations implies a need to increase interest rates earlier than previously thought and no later than the last quarter of 2010, The projected increase of core inflation to the Bank of England target warrants policy rate to 3.5pc by the end of 2011."

The same academic economists have sleep walked governments to the edge of bankruptcy, much as those that populate the bankrupt bailed out banks had succeeded in doing so during 2008.

Interest Rate Rise Around the Corner

The base rate is at 0.5%, whilst CPI is at 3.7%, the base rate should be at least 4.5%. This is as a direct consequence of bailing out the banking sector where money is being effectively stolen from savers and dumped onto the balance sheets of banks, who then recycle it out as bonuses for fictitious profits that only exist because of the forced tax payer and savers bailout.

Still the OECD whilst 6 months behind the curve is still ahead of the The Bank of England and the mainstream press who have continued with the mantra of NO change in UK interest rates this year, this is illustrated by Roger Bootle of the Daily Telegraph's repetitive assertions that he expects UK interest rates to stay below 1% for the next 5 years! Meanwhile market interest rates have already risen as the bond markets price in higher inflation and interest rates, with the bond market targeting a year end interest rate of between 4.5% and 5% for UK government bonds which will have severe implications for the financing of Britians huge and growing £1 trillion debt mountain (PSND) with total liabilities extending to more than £3.7 trillion.

My in depth analysis of 13th January (UK Interest Rate Forecast 2010 and 2011 ) concluded with the following forecast, that takes into account that despite the Bank of England wanting to keep interest rates at 0.5%, the market as a consequence of

UK Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%.

UK Inflation Forecast 2010

My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) as illustrated by the below graph.

UK Inflation April 2010

Inflation Is a Government Stealth Tax On / Theft From Savers and Workers

Whilst Mervyn King writes letter after letter full of repetitive worthless excuses as to why the Bank of England cannot do its job. The price is being paid for by ordinary savers and workers who are in effect being robbed by the banks and the government as inflation is a stealth tax on savers and earners that seeks to stealthily destroy the real value of accumulated life time savings and erode the real purchasing power of earnings.

Add to this that savings are TAXED at 20% then savers should be enraged and demonstrating in the streets as to why they are receiving a pittance of interest rates at just 2.5% on even the top ranked savings accounts when inflation as measured by RPI is at 5.3%, and when tax is taken into account savings interest rates would need to be at 6.4% JUST to break even against inflation. So basically the Government, Bank of England in collusion with the bankster's are STEALING more than 50% of the earnings capacity of savings and therefore theft of the real capital value.

Inflation Protection for Ordinary Savers

With RPI at 5.3% the only real effective protection that ordinary savers can seek is in National Savings Index Linked Certificates which pay RPI +1% TAX FREE as mentioned in the Inflation Mega-trend Ebook (Free Download). However protection here is limited to a maximum of £15k per issue per individual.

VAT 20% Inflation Time Bomb

Temporary Inflation ? So called temporary Inflation is into its 6th money, will it still be temporary when it soars above 4% CPI and 6% RPI as a consequence of the VAT hike to be announced in the ConDem emergency budget on 22nd of June, as I wrote recently (05 May 2010 - Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge )

A post UK election VAT hike to 20% from 17.5% is near certain to bring in extra revenue of about £13 billion per year. This will have the effect of both spiking inflation sharply higher and maintaining the ongoing longer-term inflationary mega-trend, therefore I would not be surprised that following the implementation of a VAT tax hike that CPI spikes above 4% and RPI as high as 6%! Which would further discredit the Bank of England's mantra of "Don't Worry Folks its Only Temporary".

Source: http://www.marketoracle.co.uk/Article19927.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 and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. 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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© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

dh
10 Jun 10, 08:01
UK Rate Forecast

UK base rates did not go up as you predicted last year and will not go up this year as you predict. I see no hike in UK rates until next summer at the earliest.


Nadeem_Walayat
10 Jun 10, 09:35
UK interest rates

Unlike the mainstream press and the academic fools that revise their forecasts EVERy month, I don't tend to change my forecasts so you will have PLENTY of time to remind me.

I prefer the word forecast rather than prediction, because no one can predict the future, all one can do is to build a scenerio that attempts to generate a probable outcome, which in my case is illustrated by the 100 page inflation mega-trend ebook which points to higher interest rates as a consquence of higher inflation (come to pass) and higher GDP growth (about to come to pass).

But if you do listen to the mainstream press and academic economists then you will be 6 months or longer behind the curve, as the Bankster of England continues its worthless mantra of temporary inflation that seeks to steal the wealth of EVERY wage earner and SAVER !

Best

NW.


vin man
10 Jun 10, 14:32
rates

Rates will inevitably escalate both as a consequence of QE and because of inflation.The only way this wont happen is if the pound devalues significantly. Not a good outcome either way, but wasnt this inevitable? To think and forecast otherwise is utter folly.


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