UK Interest Rates on Hold as Economy heads towards Stagflation

By: Nadeem_Walayat

The Bank of England paralysed by fear of igniting a wage price spiral amidst surging inflation is again expected to keep UK interest rates on hold at 5% despite the UK housing market plunging off the edge of a cliff towards what will be come to be known as the UK house price crash of Summer 2008. The UK economy is fast decelerating towards a recession during mid 2009 GDP data which would normally call for rate cuts to start now, which would require surprisingly benign yet to be released inflation data for July.

UK Inflation as measured by the governments preferred measure, CPI looks set to breach the 4% level over the coming months which ensures that the Bank of England on a technical basis CANNOT CUT interest rates whilst inflation is rising. At today's MPC meeting the Bank of England members will already know what the inflation for July is as the data will not be released to the public for another week. There is a small chance that based on an horrific surge in inflation for July 08 to well beyond 4% that the Bank of England may even raise interest rates. As I say this is very unlikely but if it did occur would signal inflation jumping from June's 3.8% to something along the lines of 4.3% for July.

Similarly on the other side the chances for a cut are very low, though marginally higher than those for a rise, as a cut in UK interest rates will require no increase in July inflation over June's 3.8%.

Therefore on balance the most probable outcome today is for No change in UK interest rates.

Without pre-empting the UK interest rate forecast for 2009 which is due to be completed later this week, what I can say is that the UK does look set to head for much lower interest rates and the current inflationary surge 'should' prove temporary and start to implogde. The next cut is most likely to occur just after release of 2008 quarter 3 GDP data later this year. Watch out for the 2009 forecast in the coming days.

The UK Economy is forecast to grow by between 1% and 1.3% this year as of analysis of December 2007, which now seems highly optimistic. Still it is interesting to see that the IMF is belatedly coming around towards an more forecast more inline with the economy with just over 4 months left for 2008 by revising their forecast again lower to a 1.4% growth forecast for 2008, as against the forecast as of late 2007 of 2.3% for 2008. Therefore the IMF has cut their forecast for UK 2008 growth by 40%, and given a couple more months perhaps the forecast will be revised lower once more to 1.2% ? A seemingly totally pointless and worthless exercise for those that made business and investment decisions for 2008 towards the end of 2007.

Previous interest rate analysis / forecasts have proved remarkably accurate, and which were contrary to the consensus view at the time of their respective publication.

2008 - UK interest rates to fall to 5% by September 2008 - Aug 07, Sept 07 (revised to 4.75% - Jan 08)

2007 - UK Interest rates to peak at 5.75% by September 2007 - Dec 07

Also expect a major update to the UK house price forecast this looks set to cover next 3 years. The existing analysis / forecast as of August 2007, called for a UK house price peak in August 07, and for prices to fall at an average rate of 7.5% per annum (minimum). recent trend forecast into end 2008 is as per the below graph.

Market Oracle Track Record of Calling Monthly Interest Rate Decisions

Month	Market Oracle Forecast	Actual MPC Decision	Outcome
Aug 08	No Change	Pending
July 08	No Change	No Change
Jun 08	No Change	No Change
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			94%

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

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

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.

© 2005-2012 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Comments