Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
How Crazy It Is to Short Gold with RSI Close to 30 - 16th Jul 18
Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18
Stock Market Uptrend Continues, But... - 16th Jul 18
Emerging Markets Could Be Starting A Relief Rally - 16th Jul 18
(Only) a Near-term Stock Market Top? - 16th Jul 18
Trump Fee-Fi-Foe-Fum Declares European Union America's Enemy! - 16th Jul 18
US Stocks Set For Further Advances As Q2 Earnings Start - 15th Jul 18
Stock Market vs. Gold, Long-term Treasury Yields, 10yr-2yr Yield Curve 3 Amigo's Update - 15th Jul 18
China vs the US - The Road to War - 14th Jul 18
Uncle Sam’s Debt-Money System Is Immoral, Tantamount to Theft - 14th Jul 18
Staying in a Caravan - UK Summer Holidays 2018 - Cayton Bay Hoseasons Holiday Park - 14th Jul 18
Gold Stocks Summer Lows - 14th Jul 18
Trump US Trade War With China, Europe Consequences, Implications and Forecasts - 13th Jul 18
Gold Standard Requirements & Currency Crisis - 13th Jul 18
Focus on the Greenback, Will USD Fall Below Euro 1.6? - 13th Jul 18
Stock Market Outlook 2018 - Bullish or Bearish - 13th Jul 18
Rising Inflation is Not Bearish for Stocks - 13th Jul 18
Bitcoin Picture Less Than Pretty - 13th Jul 18
How International Observers Undervalue the Chinese Bond Market - 13th Jul 18
Stocks Trying to Break Higher Again, Will They? - 12th Jul 18
The Rise and Fall of Global Trade – Redux - 12th Jul 18
Corporate Earnings Q2 2018 Will Probably be Strong. What This Means for Stocks - 12th Jul 18
Is the Relative Strength in Gold Miners to Gold Price Significant? - 12th Jul 18
Live Cattle Commodity Trading Analysis - 12th Jul 18
Gold’s & Silver’s Reversals’ Reversal - 12th Jul 18
The Value of Bitcoin - 11th Jul 18
America a Nation Built on Lies - 11th Jul 18
China, Asia and Emerging Markets Could Result In Chaos - 11th Jul 18
Bullish Gold Markets in the Big Picture? - 11th Jul 18
A Public Bank for Los Angeles? City Council Puts It to the Voters - 11th Jul 18
Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - 11th Jul 18
Argentina Should Scrap the Peso and Dollarize - 11th Jul 18
Can the Stock Market Close Higher For a Record 10th Year in a Row? - 11th Jul 18
Why Life Insurance Is A Must In Financial Planning - 9th Jul 18
Crude Oil Possibly Setting Up For A Big Downside Move - 9th Jul 18
BREAKING: New Tech Just Unlocked A Trillion Barrels Of Oil - 9th Jul 18
How Trade Wars Penalize Asian Currencies - 9th Jul 18
Another Stock Market Drop Next Week? - 9th Jul 18
Are the Stock Market Bulls Starting to Run? - 9th Jul 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Credit Quake Persists Ahead of UK Interest Rate Cut of 1%?

Interest-Rates / UK Interest Rates Nov 03, 2008 - 12:17 AM GMT

By: Nadeem_Walayat

Interest-Rates Best Financial Markets Analysis ArticleThe Bank of England is expected to follow last weeks U.S. interest rate cut of 0.5% by cutting UK interest rates at Thursdays MPC meeting, speculation is growing that in the face of the economic meltdown of the economy that is falling off the edge of a cliff, that the Bank will take the unprecedented action of cutting interest rates by a whole 1%. The problem here is that as I have observed and commented on these past few years is that the Bank of England's MPC is incompetent , having repeatedly failed in all respects, which is especially apparent in its primary objective of pegging UK inflation at CPI 2% and between the boundaries of 1% and 3%, therefore will the MPC be able to make the leap and cut interest rates by a whole 1% as the economy demands ? , read on...


The existing Market Oracle forecast is UK interest rate forecast to be cut from 5% to 3.25% by September 2009. However since the forecast was made, the Labour Government has significantly eroded the Bank of England's control over interest rates so that urgent action can be taken to prevent the recession from turning into an economic depression, this therefore increases the chances of a rate cut of far more than 0.5%, possibly even 1% at this Thursdays MPC meeting, as the targeting of inflation has now been effectively abandoned.

LIBOR Credit Quake Persists

The credit quake in the wake of Lehman's Bankruptcy continues to persist as observed by the Sterling LIBOR spread to the base interest rate. Despite all of the government actions to date of increasing tax payers liability by £500 billion to get the money markets to unfreeze and the banks lending again, the rate spread suggests that there has been little movement in the money markets. On the contrary it increasingly seems that the part nationalised banks are using tax payers money for mergers and acquisition purposes rather than lending.

What this effectively means is that the impact of interest rate cuts on the economy is subdued which implies that whilst UK interest rates stand at 4.5%, the impact on the economy is if interest rates were at 5.5%. Therefore a 0.5% cut to 4% would imply an economic rate of 5%, this reinforces the possibility of a rate cut of 1% to 3.5% would have the impact of bringing the rate to the economy down to 4.6%. This suggests that interest rates should be cut far more deeply than 'economic theory' that the academics in the ivory towers work with suggests i.e. to reach an economic rate of 3.5% we would need to see a UK interest rate of as low as 2%.

However, the question now is who is in charge of UK monetary policy ? For if it is the Bank of England Monetary Policy Committee then were are doomed to too little too late action as history suggests, then rate cuts will occur inline with the Market Oracle forecast towards 3.25% by September 2009.

However, if now Gordon Brown is in charge via his Darling mouth piece then we can expect a 1% cut in UK interest rates this Thursday. It will be interesting to see exactly who is in charge for a 1% cut will mean that the monthly MPC meetings are now a facade and we need to look elsewhere to determine what the UK's interest rate policy is than the uttering's from the mouths of MPC members. A cut of 0.75% will imply that there is a tug of war going on amidst much ambiguity, with the government not having made up its mind that it now wants total responsibility over interest rates. A cut of 0.5% means, well, we are doomed to a deep long recession, whilst the BOE MPC members sip tea and munch on digestives as they discuss the weather and the theories of monetary policy with little evidence of ever having actually participated in the money markets.

The Implications of Deep Interest Rate Cuts

Whilst people are quick to rejoice at the news of deep interest rate cuts to bolster the economy, however there is a price to pay as I voiced over 6 months ago that would occur following the Bank of England being forced to cut interest rates regardless of the inflation rate, and that price is in the CRASH of the British Pound from 2.10 to 1.55 or 26%! For there is no such thing as a free lunch, the crash in sterling will result in higher inflation beyond the current period of deflation i.e. the PERFECT STORM that we have been heading for these past 12 months, and now accelerating into. The perfect storm of asset price deflation coupled with currency devaluation inflation equals stagflation for several years, therefore this recession will be followed by subdued economic activity for many years.

Technically the British Pound is extremely oversold and it should rally back to above £/$1.70, however it is in full crash mode which was evident during the slice through support at £/$1.70 down to £/$152.80, therefore sterling may continue slicing through multi-year support levels all the way towards the armageddon hyper-inflationary support level of £/$1.37 despite the current extreme oversold state. This is extremely inflationary in terms of consumer prices, but deflationary in terms of real-terms asset prices. More on this in my forthcoming analysis and forecasts for UK inflation, GDP and of course the much in demand UK house prices following the crash of 2008 . Subscribe to our always free newsletter to get the scheduled analysis in your inbox on the day of publication.

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 derivatives, portfolio management and analysing 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.

Attention Editors and Publishers! - You have permission to republish THIS article. Republished articles must include attribution to the author and links back to the http://www.marketoracle.co.uk . Please send an email to republish@marketoracle.co.uk, to include a link to the published article.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules