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UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits

Interest-Rates / UK Interest Rates Aug 04, 2016 - 09:02 AM GMT

By: Nadeem_Walayat

Interest-Rates

Today is the day when UK interest rates will be cut from 0.5% to probably 0.25%, there lowest levels for over 320 year history of the Bank of England. Which follows over 7 years of rates being held at 0.5% the duration of which has seen virtually ALL economists reveal their true level of ineptitude as they have collectively consistently forecast that UK Interest rates were always just about to head higher, that the start of a series of rate hikes was just months away, which not only never materialised but is now hit with the reality of a RATE CUT! And probably announce an additional QE of at least £50 billion to monetize UK government debt and generate artificial profits for the Bank of England's banking sector brethren.


Now compare today's interest rate cut reality against the REMAIN establishments operation fear that had painted a relentless propaganda picture all year for a significant rise in UK interest rates following a Brexit outcome that was destined to send consumer borrowing rates soaring, which at the time I repeatedly warned was just NOT going to happen for the fundamental reason that BrExit induced uncertainty would make a rate hike LESS likely as the last thing the Bank of England would want to do is to add to market uncertainty i.e. the complete opposite to REMAIN propaganda. In fact I stated that a BrExit could even result in a rate CUT as the following excerpt illustrates:

06 Feb 2016 - UK Interest Rates, Economy GDP Forecasts 2016 and 2017

UK Interest Rates Conclusion

Therefore the overwhelming picture is one of the Bank of England continuing to kick the interest rate can down the road for the whole of 2016 and probably for the whole of 2017 too, even if inflation rises to above 2%. Where even a BrExit induced mini-sterling crisis is unlikely to prompt the BoE to shift on UK interest rates. Especially as I expect the UK economy to significantly weaken to an average GDP of 1.6% per annum that compares against BoE expectations of 2.6% per annum.

The bottom line is that a paralysed BoE remains terrified of its banking brethren that could yet go bankrupt again, especially given Britain's continually expanding debt mountain, and thus will only hike rates when it is faced with an even worse crisis. In fact odds probably favour a CUT in interest rates rather than a RISE, maybe even going negative, though negative interest rates just do not work because they act as a tax on the economy instead of a stimulus.

Market Implications

Low borrowing costs and savings interest rates are likely to continue to persist for the next 2 years. Therefore savers should eye fixes of at least 2 years for higher rates. Bank customers also need to be aware that there is a real risk of NEGATIVE interest rates, which means the BANKS will STEAL a percentage of your bank deposits each year. That's right, the banks take your bank deposit, loan it out at 5%, 10%, or 20% and then will CHARGE you for allowing them to do so with your money. If this is not the behaviour of crime syndicate then what is it?

Expect further ongoing weakness for sterling, a trend forecast for which will follow in a separate analysis. Lack of rate hikes and the prospects for further easing are supportive of the stock and housing markets for 2016.

And again the accompanying video analysis:

So where do we stand now that BrExit has happened?

The S&P has apparently downgraded Britain from its Triple AAA credit rating that it has held since 1978, even through the worst of the financial crisis to now AA. Though against the S&P also downgraded the whole of the European Union block from AA+ to AA though that masks internal differences of for instance Spain on BBB+, Greece B-, France AA, Italy BBB-1, In fact its only Germany with a higher credit rating than Britain of AAA. So where where ratings are concerned its always a case of where a nation stands relative to others, in which case the ratings as things stand today won't result in any real market impact, i.e. implied higher borrowing costs are NOT happening, instead borrowing costs have become CHEAPER post BrExit.

Whilst the Bank of England's panicky statements and actions post BrExit made things crystal clear that :

a. The Bank of England rather than raising interest rates was instead likely to CUT interest rates over the coming months and probably sooner than later. Though whilst negative interest rates are possible, they are not probable because they would have a negative impact on banking sector profitability i.e. may have the opposite effect on the economy than intended.

b. That the Bank of England had made available upto £250 billion for its banking brethren, to effectively lap up free money to trundle along and invest in government and corporate and of course the stock market, which means the potential £250 billion is QE in all but name! And you don't have to look far to see the effect that it has already had in sending stocks soaring into the stratosphere!

c. That the Bank of England is going to undertake more official QE, that's print more money on top of the estimated £500 billion to date, probably at least another £100 billion of QE over the next 12 months to inject into the UK economy via the banking sector primarily through the buying of government bonds i.e. monetizing UK government debt which has the effect of reducing Britains debt burden at the cost of inflation as printing money to monetize debt tends to push currencies lower. Though with the Pound already having fallen by about 12% then much of that has already been priced into the market.

Mark Carney key points concerning interest rates and QE :

"In my view, and I am not pre-judging the views of the other independent Monetary Policy Committee (MPC) members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,"

"As we have seen elsewhere, if interest rates are too low - or negative - the hit to bank profitability could perversely reduce credit availability or even increase its overall price,"

So my advice to savers and investors of 6 months ago proved highly prescient that savers should seek to lock into the then higher savings rates being offered ahead of BrExit which since have continued to fall. In fact we have become so conditioned by near zero interest rates that we forget we are living in a time of central bank PANIC, which is what 0.5% interest rates let alone today's 0.25% are a reflection of, near 8 years of perpetual central bank PANIC!

Nothing illustrates this point than the rates savers were able to secure before the panic cuts in interest rates began as I warned over 7 years ago to lock in rates for as long as possible, several years in fact though not even I foresaw that the panic would still persist near 8 years on!

08 Oct 2008 - UK Interest Rate Forecast 2009

Savers - To reiterate what I have been saying over the last 6 months, savers still have a a golden opportunity to lock in high fixed savings rates which in the UK are above 7% . These rates won't stay around for much longer, were talking perhaps in the days rather than weeks or months. So the time for action is now ! - Yes, banks can go bankrupt but savings are protected which includes accumulated interest. In the UK the protection is for the first £50k per banking group.

And there is even worse to come for savers as my following video on the War on Cash illustrates that the banks are engineering a situation that will allow outright theft of bank customer depositors, NEGATIVE interest rates as recent press stories of HSBC, RBS and Barclays warning business customers that they could be CHARGED INTEREST on CREDIT balances which today's rate cut brings closer to materialising.

https://youtu.be/WGbEpnOqY3w

And if you think that a cut to 0.25% is a sign of crisis here then what about the Euro-zone and Japan where the base rates are zero and bond yields and LIBOR are negative. It's because the crisis in the Euro-zone and Japan is MUCH worse than that of post Brexit Britain as the recent bank stress tests illustrate with most notably a number of Italian banks once more teetering on the brink of collapse given the magnitude of their bad debts that far exceed capital reserves, bad debts that likely exceed Euro 400 billion! And not forgetting the perpetual ticking time bomb that is GREECE!

UK Bonds

UK bonds all year trended in the opposite direction to that implied by increasing risks of a BrExit vote which is indicative of both central bank intervention and safe haven buying, with the most recent rise in the 10 year bond yield to 1.35 evaporating post Brexit, seeing the 10 year bond yield falling to an unprecedented 0.69%, and currently standing at just 0.8%.

Overall the UK bond market has shown none of the signs ALL YEAR of what operation fear had been warning of i.e. for a sharp rise in interest rates. Instead once more the exact opposite is proven to be true!

For more extensive post BrExit analysis see the following 2 articles -

And my most recent video on UK house prices -

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2016 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 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 focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 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

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

R.E.B
04 Aug 16, 20:45
Gold a buy once more?

All this has made me look at gold once again, and some of the depressed commodity stocks. Is it looking like gold has turned?


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