UK Interest Rate to be Kept on Hold at 5%

Interest-Rates / UK Interest Rates Jun 05, 2008 - 01:37 AM GMT

Best Financial Markets Analysis Article The Bank of England Monetary Policy Committee is expected to keep interest rates on hold at 5% at today's meeting. UK inflation hit the Bank of England's upper boundary of 3% CPI in April 08, therefore ruling out the possibility of a further rate cut despite a sharp slow down in economic activity with UK growth on target to hit the Market Oracle forecast of 1.3% for 2008.

The Market Oracle interest rate forecast is for a fall to 4.75% by September 2008. The surge in food and fuel costs which has seen crude oil prices rise by 90% in a year has helped to push the UK inflation higher as the cost of fuel rises are passed on across the production and transport chain, and therefore is expected to continue to push inflation higher for several more months , thereby implying no interest rate cuts during the summer months.

A potential spanner in the works in forecasting interest rates against inflation trends is due to the inflation measures such as CPI and RPI having been heavily manipulated by governments so as to no longer accurately reflect the real rate of inflation. This has serious implications for the UK economy as it implies a loss of confidence in the official inflation statistics amongst workers that will lead to far higher pay settlements and industrial disputes which are already occurring in he public sector as the real cost of living is estimated at RPI + 1%, therefore currently approx. 5.2%. The net effect of which is that real inflation has been under reported by over 12% since 2003 on CPI inflation and therefore CPI linked pay has lost 12% of real purchasing power.

UK Money Supply growth adjusted for the velocity of money trend implies that the current upsurge in official inflation statistics is temporary, therefore if the crude oil prices stabalise then the money supply indicator suggests sharply lower inflation towards the end of this year. The Market Oracle forecast as of 20th May 08 is for crude oil prices to correct lower towards $110 over the coming weeks, following the spike that saw crude oil rise to above $135.

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Market Oracle Track Record of Calling Monthly Interest Rate Decisions

Month	Market Oracle Forecast	Actual MPC Decision	Outcome
Jun 08	No Change	Pending
May 08	No Change	No Change
Apr 08	0.25% Cut	0.25% Cut
Mar 08	No Change	No Change
Feb 08	0.25% Cut	0.25% Cut
Jan 08	No Pre-call	No Change	-
Dec 07	0.25% Cut	0.25% Cut
Nov 07	No Change	No Change
Oct 07	No Change	No Change
Sept 07	No Pre-call	No Change	-
Aug 07	No Change	No Change
Jul 07	0.25% Increase	0.25% Increase
Jun 07	No Change	No Change
May 07	0.25% Increase	0.25% Increase
Apr 07	No Pre-call	No Change	-
Mar 07	No Pre-call	No Change	-
Feb 07	0.25% Increase	No Change
Jan 07	0.25% Increase	0.25% Increase
Dec 06	No Pre-call	No Change	-
Nov 06	0.25% Increase	0.25% Increase
Overall Rate Forecast Accuracy			93%

By Nadeem Walayat

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 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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